$1.60 Meridian limit advised

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 made.''

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 dividends.

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 investment.

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 election.''

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 users.

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 result.''

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 said.

For institutional investors, the final instalment will be between 50c to 80c, based on the offer price of $1.50 to $1.80.

The final price will be determined by a book-building process from October 21 to 23.

 

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