Meridian Energy Limited

MEZ Details 

Meridian Energy Limited (ASX: MEZ) is engaged in the generation of electricity through 100% renewable sources such as wind, water and sun. It supplies the electricity to customers from the electricity grid which mixes electricity supplied from both renewable and non-renewable sources. The company has a market capitalization of ~$13.19 billion as on 5^th May 2021.

Result Performance – For the First Half Ended 31 December 2020 – (H1FY21)

For the first half ended 31 December 2020, the revenue of the company grew by 5.0% to $1,869 million in H1 FY 2021 versus $1,780 million in H1 FY 2020 mainly driven by a rise in energy sales to customers by 8.9% YoY to $1,086 million, followed by an increase in revenue from energy-related services by 25.0% YoY to $5.0 million. Further, EBITDAF stood at $422 million for the period, a fall of 9.2% on pcp because of lower New Zealand hydro generation and lower market prices in Australia. It reported NPAT of $227 million, up 18.8% YoY.

H1FY21 Financial Performance (Source: Company Reports)

Recent Updates:

• As per the release dated 3 May 2021, the company has successfully completed the on-market share buyback, relating to the FY21 long-term incentive scheme. It acquired 476,174 ordinary shares on the NZX at an average price of NZ$5.49 per share.
• On 28 April 2021, the company stated that MEZ and New Zealand’s Aluminium Smelter (NZAS) have agreed on an electricity swap that will facilitate NZAS to voluntary cut down its consumption of electricity at the Tiwai Aluminium Smelter by up to 30.5MWh per hour effective from 28 April 2021 to 31 May 2021 to assist in managing the dry hydrology condition in the country.

Key Risks:

The company is exposed to risks related to climate change. The change in climate can result in a change in the structure of the dam. Further, high rise in temperatures are likely to 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: 

As per the management, the performance of Meridian and Powershop brands are projected to shine in further. In line with this, production volume and price volatility will be the key elements in driving top-line and bottom-line performance in the future period. Further, the company sees a jump in customer numbers in New Zealand and Australia in the coming periods. Importantly, the company has extended an agreement with Rio Tinto to extend the planned closure period from August 2021 to December 2024.

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

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

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/

Having made a high of $9.33, the stock came under selling pressure and in the process, it made the low around $4.60 thereby correcting beyond the 61.8% retracement level of $5.75. For the past couple of weeks, the stock has been in a consolidation phase. While remaining in a consolidation phase, the stock has given a softer close of around $4.98 for the ongoing week. The technical indicator RSI with a reading around 44 and a flattening curve at the end, suggests flat to neutral momentum for the stock.

Going forward, the stock may have resistance around the 61.8% retracement level of $5.75 whereas support could be around the previous low of $4.60.

Stock Recommendation

The stock has a 52-week low and high of $4.02 and $9.33, respectively and is currently trading below the average of 52-week high-low range. The stock reported a rise of ~13.5% in 9 months, and ~20.8% in 1 year.

We have valued the stock using a Price/Sales multiple-based illustrative relative valuation and have arrived at a target price which reflects a rise of low-double digit (in % terms). We have assigned a slight premium to EV/Sales Multiple (NTM) (Peer average) as the company expects new client wins in coming periods. Also, the company’s ROE has improved in H1 FY 2021 on the YoY basis. 

Considering the current trading levels and organic growth pipeline across key markets, we give a “Buy” rating on the stock at the current market price of $5.100 per share, down by 0.971% on 5^th May 2021.

MEZ Daily Technical Chart (Source: Refinitiv (Thomson Reuters))

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

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