Date : 28/09/2020

Meridian Energy

NZE :

MEL

Market Cap : $11.92 Billion

Dividend Per Share : $0.17

Dividend Yield : 5.37 %

Buy

52 Week Range : $3.61 - $5.80

Share Price : $4.95

Meridian is a huge player in the utilities sector. It has a good history of past performance and a good balance sheet. With high growth forecasts for the renewables industry and an almost certain bounce back of demand, we issue a "Buy" recommendation.

Company Analysis

Meridian Energy (NZX: MEL) is a 100% renewable electricity generator that retails to homes, farms, and businesses. Meridian generates electricity using solar, wind, and hydro sources. The firm is the largest electricity generator in New Zealand and currently operates using 5 wind farms, 7 hydro stations, and solar arrays. In Australia, Meridian owns and operates 2 wind farms, and 3 hydro power stations.

Meridian generates approximately 30% of the national electricity in New Zealand and retails through Meridian Energy and Powershop. The firm provides electricity to 324,000 customers as of June 2020, and New Zealand accounts for a little over 89% of its total revenues.

In Australia, the firm operates by providing energy services to DC Power and Kogan Energy. It has over 174,000 customers across 4 states with the recent inclusion of South Australia. 10% of its revenues currently come from Australia.

Flux, a customer facing interface software is a subsidiary of Meridian. Flux was built to help energy businesses manage better using analytics with a state-of-the-art modern system. It can be leveraged to acquire customers, reduce costs, and improve customer experiences using data analytics. The software company operates in New Zealand, Australia, and the UK. It is supporting over 513,000 customers and will continue to grow as customers migrate from rigid, legacy software.

Company Updates

The stock was trading at a 52-week high before the March downturn. The uncertainty over energy demand wiped out the share price in March. However, it has recovered well since. The FY2020 report was a good performance given the economic uncertainty.

Despite a significant recovery, the stock has been volatile due to investor moods and momentum during these turbulent times.

During peak lockdowns in New Zealand, demand declined 14%. The average power generation price has decreased by 28% from FY2019. The NZ business has reported a 7%-8% growth in sales in residential retailing, and a 30% growth in corporate sales volume during FY2020.

Australian segment reported a 24% growth in electricity sales volume and customer acquisition in FY2020. Gas customers increased by 68%, resulting in gas sales volumes going up 310%

The firm also boasts a disconnection rate of less than 0.1%, which is half the industry average. This suggests strong retention rates.


Source: Tradingview.com

Industry Analysis

Renewable energy is the future. With the gradual depletion of fossil fuels and the environmental impacts that are caused by burning them, renewables are primed to completely replace them in the near future.

The renewable energy industry is entering a new growth phase that will be led by customer demand and competitive prices. We expect governments to facilitate this shift, and New Zealand’s target of 90% electricity generation from renewable sources by 2025 complements this.

Recently, Australia met its target of 20% large scale renewable energy generation by 2020. We expect Australia to push forward and achieve its 2030 target of 50%.

The growth rates and adoption are high. Meridian currently accounts for about 30% of the national electricity generation in NZ.

Investment Thesis

Meridian reported a slight drop off in revenues in FY2020. We believe this is due to the decrease in demand as everybody navigates through these uncertain times. Revenues came in at $3.4 billion, operating expenses at $2.9 billion – 3.6% increase from the previous year.

The decrease in revenues and increase in expenses resulted in a 31% decline in operating income and 48% decline in net income. The EBITDA margin dropped off by 4%.

The current cash position of Meridian is $347m. While this can cover the current portion of long-term debt and leases come in at $95m, the total current assets sit at $665m and total current liabilities are $648m. This metric measures the short-term financial health of the firm. Given the uncertainty in demand and the impacts of Covid19 on the firm, it should be a cause for concern to investors.

The long-term financial health however shows strength. Total assets exceed total liabilities by 2.11x. The total debt Meridian holds on its balance sheet is $1.7b.

Majority of Meridian is owned by the New Zealand government. The current capital structure consists of 26% debt and 74% equity. The fact that it is majority government owned mitigates risks involved with operating during the pandemic restrictions. The firm will be supported in any unforeseen event, further reducing any credit default risk it faces.

The decrease in performance in FY2020 resulted in the earnings per share to drop off to $0.07. However, the firm had enough revenues in an otherwise stable business to pay a dividend of $0.17 per share at a payout ratio of 238.6%.

Recommendation

Meridian is a big player in the utilities sector. The firm’s financial health is backed up by good past performances prior to the pandemic. The renewables industry will only grow and will benefit from increased consumer demand in the future. The risk of navigating in the current economic climate is partially offset from majority government ownership of the firm. Hence, with strong fundamentals, we issue a “Buy” recommendation to investors who are looking at long-term exposure and are willing to look past current market volatility that may swing prices in the short-term.

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