Section 1: Company Overview and Fundamentals Insights

1.1 Company Overview

Contact Energy Limited (ASX: CEN) is an electricity generation company, and it operates a renewable portfolio of electricity generation assets. The company operates 11 power stations and produces the majority of its electricity from renewable hydro and geothermal stations.

1.2 The Key Positives, Negatives, Investment Highlights, and Risks

1.3 Top 10 Shareholders: The top 10 shareholders together form ~20.29% of the total shareholding. Milford Asset Management Ltd. and Accident Compensation Corporation are holding a maximum stake in the company at ~6.08% and ~3.89%, respectively.

1.4 Key Metrics: The company has reported a high asset turnover ratio of around 0.45x in FY22 compared to 0.25x of the industry median. Further, retail segment revenue showed growth from NZD 951mn in FY21 to NZD 1,011mn in FY22, driven by innovative retail plans and constant pricing. Below is captured the trend of the net margin and gross margin:

Section 2: Business Updates, Financial and Operational Highlights

2.1 Recent Updates:

2.2 Results Highlights of FY22: Gross revenue from electricity for retail business in FY22 was around NZD 872mn relative to NZD 841mn in FY21. Further, CEN paid NZD 43mn as interest expense in FY21, which declined to NZD 28mn in FY22.

2.3 Business Strategy:  The company continues to progress numerous ranges of renewable energy projects across New Zealand with the aim of decarbonisation. These projects further support the acceleration of the CEN’s Connect26 strategy.

2.4 Dividend History: The board of CEN approved the final ordinary dividend of 21 cents per share, which was in accordance with its dividend policy. The FY22 total dividend paid by the company was around 35cps (40% interim and 60% final), and the company provided distribution guidance for FY23 to be around 35cps.

Section 3: Key Risks and Outlook:

Section 4: Stock Recommendation Summary

4.1 Price Performance and Technical Summary

4.2 Fundamental Valuation

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: Past performance is not a reliable indicator of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance levels is September 29, 2022. The reference data in this report has been partly sourced from REFINITIV.

Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level at which the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest. Support 1 refers to the nearby support level for the stock and if the price breaches the level, then Support 2 may act as the crucial support level for the stock.

Resistance: A level at which the stock prices tend to find resistance when they are rising, and an uptrend may take a pause due to profit booking or selling interest. Resistance 1 refers to the nearby resistance level for the stock and if the price surpasses the level, then Resistance 2 may act as the crucial resistance level for the stock.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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