Company Overview: Meridian Energy Limited (ASX: MEZ) is one of the leading renewable energy companies in New Zealand. It is mainly involved in the generation of electricity from 100% renewable sources – wind, water, and sun. MEZ owns hydropower stations and wind farms that generate electricity. It supplies electricity to customers through an electricity grid that combines electricity supplied from renewable and non-renewable sources. The company is listed on both the New Zealand Stock Exchange (NZX) and Australian Securities Exchange (ASX).  MEZ was listed on ASX on 29 October 2013.

MEZ Details

November 2021 Operating Results Highlights: During November 2021, the company’s New Zealand customer connection numbers increased by 0.5%. Notably, the company’s retail sales volumes in November 2021 were 11.5% higher than November 2020.

• In the month to 9 December 2021, national hydro storage grew from 119% to 128% of the historical average.
• If compared to November 2020, the company’s segment sales in residential segment grew by 9.4% in November 2021, and in small medium business segment, it grew by 21.0%.

2021 AGM Highlights: On 6 October 2021, the company held its 2021 Annual General Meeting (AGM), wherein, the management highlighted that during FY21 the company was able to maintain its customer growth momentum and progress on its digitisation journey with around 95% of customers’ accounts successfully migrated to its Flux customer care and billing platform. Some of the key points highlighted at the AGM are as follows:

• FY21 Results Update: For FY21, the company reported EBITDAF of NZ$729 million, down by 15% on FY20. The company reported NPAT of NZ$428 million, up from NZ$175 million in FY20, primarily due to non-cash movements in the value of derivative instruments.
• Introduction of Dividend Reinvestment Plan: During FY21, the company announced the introduction of a Dividend Reinvestment Plan, which was applied to FY21 final ordinary dividend. Under the DRP, the company has applied 2.0% discount to its final dividend.
• Achieved Growth in Brands: Since 2018, the company has expanded the size of the combined New Zealand Meridian and Powershop brands by 40%, while managing its sales momentum.

5-Year Financial Summary (Source: Analysis by Kalkine Group)

Dividend History: The company has a track record of paying decent dividends to its shareholders. For H2FY21, the company has paid a final ordinary dividend of 11.20 cents per share, taking the total ordinary dividends for FY21 to 16.90 cents per share. At CMP of $4.38, the company’s annual dividend yield stood at 3.48%.

Dividend Trend (Source: Analysis by Kalkine Group)

Key Metrics: Net margin for FY21 stood at 10%, up from 5.2% in FY20. Asset turnover ratio for FY21 stood at 0.44x, up from 0.35x in FY20. ROE for FY21 stood at 8.3%, up from 3.3% in FY20. Current ratio for FY21 stood at 0.83x, down from 1.03x in FY21. Debt to equity ratio for FY21 stood at 0.34x, lower than 0.35x in FY20.

Net Margin Trend (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 58.71% of the total shareholding, while the top four constitute the maximum holding. New Zealand Treasury and Accident Compensation Corporation are holding a maximum stake in the company at 50.78%  and 2.03%, respectively, as also highlighted in the chart below:

(Source: Analysis by Kalkine Group)

Swaption Deal with Nova: On 23 December 2021, the company announced that it has entered Swap transactions (Contracts for Difference) and a Call Option with Nova Energy Limited. The contracts are for 5-year period, and they will commence on 1 January 2023.

Completed FY22 LTI Share Buyback: On 30 November 2021, MEZ announced that it has completed an on-market share buyback in connection with the FY22 executive long-term incentive scheme. Under the buyback, MEZ has acquired 418,384 ordinary shares on the NZX Main Board at an average price of NZ$4.6067 per share.  

Sale of Meridian Energy Australia Business: On 22 November 2021, MEZ announced that it has agreed on the sale of its Australian business to a consortium of Shell Energy Operations Pty Ltd and Infrastructure Capital Group (ICG) for A$729 million. It is expected that the transaction will occur in the first quarter of 2022.

Key Risks:

• Electricity Price Risk: The wholesale market price of electricity is affected by the dynamics of supply and demand. MEZ is exposed to the risks associated with fluctuations in the market prices of electricity as it could impact the company’s financial performance.
• Foreign Currency Risk: The company is exposed to the risks associated with the fluctuations in the exchange rates of New Zealand and Australian dollars.

Outlook: Looking ahead, the company is focused on building clean energy systems that will help New Zealand decarbonise and achieve its climate goals. The company is working with a range of companies and partners on projects that will allow Aotearoa to transition and to thrive in a net zero emissions future. The company believes that there is enough liquidity in hedge markets to allow it to manage the wholesale price risk associated with the company’s growth. For FY22, the company expects its operating costs to be between NZ$275 million and NZ$280 million. The company will release its H1FY22 results on 23 February 2022.

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

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last six months, the stock has corrected by 12.04% and is trading lower than the average 52-week price level band of $4.28 and $7.8. The stock has been valued using EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers, considering the risks associated with the fluctuations in the wholesale electricity prices, and uncertainties surrounding COVID-19 pandemic. For the valuation purpose, peers such as Delorean Corporation Ltd (ASX: DEL), Mercury NZ Ltd (ASX: MCY), AusNet Services Ltd (ASX: AST), etc., have been considered. Considering the company’s decent customer growth momentum, improved retail sales volumes in November 2021, modest long-term outlook, current trading level, and indicative upside in valuation, we give a “Buy” recommendation to the stock at the current market price of $4.38 as on 13 January 2022, 12:30 PM, (GMT+10), Sydney, Eastern Australia.

MEZ Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

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

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