Contact Energy Limited

CEN Details

Acquisition of Western Energy Services: Contact Energy Limited (ASX: CEN) is an integrated and diversified energy firm focusing on the sale and generation of electricity and gas in New Zealand (NZ). It has two main business segments – Generation (supplying electricity to Wholesale and Customer segment) and Customer (supplies energy to customers) segments. As of 8 April 2021, the market capitalisation of the company stood at ~$6.51 billion. On 6 April 2021, CEN announced acquiring 100% of Western Energy Services (WES) shares, a contract drilling service provider in Taupo, NZ. CEN completed the deal on 31 March 2021, financed the acquisition from its present credit facilities and has not disclosed the purchase price.

Gas Tolling Agreement with Nova Energy: CEN recently announced an agreement with Nova Energy Limited to seek 3.6J of gas at market rates and deliver a similar electricity volume. This will enable producing gas through the most efficient electricity plant through its Taranaki Combine Cycle plant in winter FY21, especially in a power cut or equipment down.

February Update: The company reported total customer connections of 519k for February 2021 versus 499k in February 2020. Its Customer business reported mass market electricity and gas sales of 246 GWh, lower on pcp (275 GWh in February 2020). It registered a higher customer netback of $100.03/MWh for the month versus $93.15MWh in February 2020. It recorded 42k broadband connections versus 22k in February 2020. Its contracted wholesale electricity sales (Wholesale business) stood at 530GWh in February 2021 versus 629GWh in February 2020. CEN generated total electricity and steam net revenue of $83.65/MWh in February 2021 versus $76.62 /MWh in February 2020 for its wholesale business.  

February 2021 Highlights (Source: Company Reports)

Key Risks: The company faces the risk of volatility in the wholesale electricity prices, demand for its services by the user-industries, market uncertainty due to the pandemic, and regulatory risks impacting the business costs.

Outlook: For FY21, CEN predicts its total cash spend between NZ$255-$265 million and generation of geothermal volumes of ~3,050 GWh. It forecasts other operating costs to be in the range of NZ$190-$205 million and projects capex between $55-$60 million for FY21.

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

Data Source: Refinitiv, Thomson Reuters, 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: The stock of CEN gave a positive return of 18.00% in the past nine months and a positive return of 15.39% in the past year. The stock is currently trading lower than the 52-weeks’ average price level of $5.30-$10.56. The stock of CEN has a support level of ~$6.56 and a resistance level of ~$7.14. We have valued the stock using the Enterprise Value to Sales multiple based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at some discount than its peer average, considering its lower mass market electricity and gas sales, and contracted wholesale electricity sales for February 2021, key risks associated with the pandemic and changes in the gas and electricity business. For the purpose, we have taken peers like Mercury NZ Limited (ASX: MCY), Genesis Energy Limited (ASX: GNE). To name a few. Considering the current trading levels, increase in electricity and higher net revenue for the wholesale segment, increase in the customer connections for the February month, and valuation, we give a ‘Buy’ rating on the stock at the current market price of $6.820, up by 6.729% on 08 April 2021.

CEN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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