Meridian Energy Ltd

MEZ Details

Meridian Energy Ltd (ASX: MEZ) is engaged in the business of generating 100% renewable energy from renewable sources - wind, water, and sun. It supplies electricity to its customers under three brands – Meridian, Powershop in New Zealand, and Powershop in Australia.

H1FY21 Results Performance (For the Half Year Ended 31 December 2020)

The company has posted 5.0% YoY increase in its operating revenue to $1,869 million in H1 FY 2021 versus $1,780 million in H1 FY 2020 primarily led by a rise in energy sales to customers by 8.9% YoY to $1,086 million. However, EBITDAF reduced 9.2% YoY to $422 million on $465 million in the same period last year mainly due to a rise in operating expenses. It posted a 19% rise in net profit to $227 million on $191 million net profit of the same period last year which includes favourable changes in the value of hedge instruments. Excluding these hedge value movements, EBITDAF fell by 9%. Despite sustained customer growth, lower New Zealand hydro generation and reduced market prices in Australia negatively impacted EBITDAF from last year’s record level.

Financial Highlights (Source: Company Reports)

Operational Performance for The Month of May 2021

National hydro storage rose from 67% to 70% of the historical average in the month to 10 June 2021. The company’s monthly total inflows stood at 111% of the historical average. Its Waitaki catchment water storage at the end of May 2021 stood at 66% of the historical average, while the water storage in Meridian’s Waiau catchment remained below average. The company’s retail sales volumes in New Zealand in May 2021 increased by 23.4% from May 2020 with residential sales growing  by 5.7%, small-medium business sales rising 49.2%, agricultural sales increasing by 1.4%, large business and corporate sales increasing by 11.1% and 33.0%, respectively.

Key Risks

The company is exposed to risks related to climate change. Further, fluctuation in wholesale market prices also remains a concern. A high rise in temperatures could build the harshness of dangerous rainfall events, and consequent flood events, in catchments, which then positions a possible risk of physical damage of dam and hydro structures.

Outlook

The company continues to witness customer growth across both New Zealand and Australian markets with its customer base surpassing half a million and have grown 3% since June 2020. The company has guided its FY21 capex to stay at the higher end of the $70 million to $80 million range. The company highlighted that the underlying performance of the business stays strong and it is positive on its Meridian and Powershop brands that are continued to shine through. Importantly, the company has extended an agreement with Rio Tinto to extend the planned closure period from August 2021 to December 2024.

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

Technical Overview:

Weekly Chart –

Source: REFINITIV

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

After the previous three weeks of lower-low closing, the stock gave a stronger close for the ongoing week at $4.97 which happens to be high price. The technical indicator RSI with a reading around 46 and a curve at the end pointing up, suggests gaining of bullish momentum.

Going forward, the stock may have resistance around the 61.8% retracement level of $5.69 whereas support could be around the lower Bollinger band of $4.59.

Stock Recommendation

The stock rose by ~9.9% in 9 months and ~8.7% in 1 year. It has made a 52-week low and high of $4.160 and $9.330, respectively.

We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price that reflects a rise of low-double-digit (in % terms). We have assigned a slight premium to EV/Sales Multiple (NTM) (Peer Average) considering its continued customer growth in both New Zealand and Australian markets along with its decent operating performance in May 2021.

For the purposes of relative valuation, we have taken peers like Origin Energy Ltd (ORG.AX), New Energy Solar Ltd (NEW.AX), Delorean Corporation Ltd (DEL.AX), to name a few.

Considering the aforementioned factors and healthy liquidity position, we give a “Buy” recommendation on the stock at the current market price of $4.970 per share, up by 1.844% on 29^th June 2021.

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.

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