The short-term high dividend yield offered by Meridian Energy
made the shares worth buying through to the upper retail
limit of $1.60, Wanaka-based Logic Fund Management said in
its research note.
Director Greg Marshall said the key risk to Meridian was a
change in government, triggering a change in the retail
electricity tariff structure.
''The risk will be highly visible and investors will be able
to sell with adequate warning.
''Should the Government not be likely to change, the
attractiveness of the Meridian dividend yield can be
benchmarked against its peers once the final instalment is
Under the instalment receipts, investors would pay for their
Meridian shares in two instalments over 18 months while
receiving in full any dividends during that period.
The first $1 was payable on application with the balance due
in 18 months. The structure implied a gross yield of 13.4%
for the 12 months until October 2014, based on forecast
Mr Marshall said when determining which ''gentailer'' to add
to the equity portion of a portfolio, Logic Fund analysis
showed Meridian as the preferred investment compared with its
peers on a cash yield basis but it was marginally more
expensive than its peers on an earnings metrics basis.
The dividend payout ratio was high, and likely to stay high
for the medium term, as large capital expenditure
refurbishment programmes had been completed.
There was little in the way of new generation capacity
expected in the next five years, which was positive for
future cash flows, he said.
The initial public offering (IPO) of Mighty River Power was
disrupted by political and energy demand risks highlighted
during the process.
''These risks were not reflected in the offer price so
investors were left with an overpriced, underperforming
Now the Tiwai contract has been negotiated, and sorted, the
biggest risk on the horizon for the Meridian IPO is of
political intervention in the form of regulation post
Under the Labour-Green party proposal, New Zealand Power
would act as a single buyer of wholesale electricity, setting
the electricity prices between 10% to 14% lower for retail,
as well as 5% to 7% lower for commercial and industrial
With the election more than a year away, the risk would not
materialise until afterwards. The proposal would take time to
implement, giving investors clear visibility on when to exit,
Mr Marshall said.
As the largest electricity generator in New Zealand with 100%
renewable generation capacity, Meridian was the second of the
Government's energy assets to be partially privatised.
''With a poor taste left in the mouths of retail investors
over the aggressively priced Mighty River Power sell-down,
the Government realises it will have to work hard to satisfy
the domestic investor base to produce a satisfactory
Some lessons had been learnt as pre-IPO published research
for investors was now available. Logic Fund had a recommended
price range of $1.90 to $2.20 for Mighty River shares which
eventually listed for $2.50. The shares last traded at $2.27.
The new Tiwai contract called for the Rio Tinto aluminium
smelter to reduce production when lake levels were lower, Mr
Marshall said. The renegotiated contract provided clarity for
Meridian to push its spare capacity into the retail market as
Tiwai began to wind down production.
Given the current overcapacity of generation in the industry,
the contract allowed Meridian to rebalance its supply into
the market ahead of Tiwai closing while the current
oversupply situation stabilised, he said.
Earlier this week, independent research house Morningstar
came out in favour of the Meridian float, saying it was
likely to appeal to long-term investors seeking yield.
Independent valuations from Morningstar ($1.75),
Wellington-based investment bank Woodward Partners ($1.81)
and TDB Advisory ($1.70) were all at the top end of the
Government's final price range of $1.50 to $1.80.
Brokers First NZ Capital, which is also not involved in the
partial privatisation process, was more conservative.
Applying Contact Energy and Mighty River multiples would
indicate a fully paid trading range for Meridian shares of
between $1.43 and $1.60, with a $1.51 midpoint, First NZ
For institutional investors, the final instalment will be
between 50c to 80c, based on the offer price of $1.50 to
The final price will be determined by a book-building process
from October 21 to 23.