Taking the plunge in Mighty River

JASON KRUPP
Last updated 05:00 09/03/2013

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If there's a single question that's bound to be hogging dinner table conversation for the next few months it's whether Mighty River Power (MRP) is a good investment.

The process of selling a 49 per cent stake in the Government-owned power company kicked off this week, with mum-and-dad investors given the opportunity to pre-resister for shares in the float.

Judging by the 200,000 who signed up in the first three days, and the patchy performance of the Treasury-run website mightyrivershares.govt.nz, which buckled under the deluge of traffic, public interest has been astronomical.

Even if those who registered received only their guaranteed $2000 of shares, it would add up to $400 million out of a possible $1.7 billion in shares that are up for sale.

But while interest is sky-high, information assessing the merits of the deal has been scarce ahead of the release of the investment statement and prospectus required in an Initial Public Offering (IPO) process.

Sources within the fund management industry say that's largely due to the Maori Council's challenge to the sale, which was dismissed by the Supreme Court at the end of last month.

With the uncertainty out of the way, brokerages and investment banks are now free to start pawing through the firm's financials, but almost everyone in the equity advice business has held back pending the prospectus.

So, the question remains: Is MRP a good investment?

On the surface of it, the numbers certainly stack up. In its latest interim results announcement, MRP reported an underlying operating profit of $133 million, up 330 per cent on the same period a year ago.

That was in spite of lower revenues from its hydro and geothermal plants because of weak electricity prices as well as flat demand on the retail side of its business amid weak economic growth.

Net profit for the period was a more humble $57m after the company took write-downs to the value of its geothermal investments in Chile and Germany, but professional investors have dismissed that as typical "polishing of the balance sheet" before an IPO.

What's missing is a view on MRP's future prospects, which could tarnish the rose-tinted view presented by the firm's half-year accounts.

Hanging over the company's near term earnings is the drought gripping the central North Island.

MRP generates two-thirds of its power from nine hydro stations on the Waikato River, and levels at the source, Lake Taupo, have dropped to their lowest level in since June 2010.

The lake's water level is sitting at 356.22 metres above sea level, in the bottom 20 per cent of MRP's operating levels.

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Under typical circumstances the shortage would be offset by higher wholesale electricity prices. But brimming hydro lakes in the South Island, a cutback in Tiwai aluminium smelter production and low economic growth are likely to keep a lid on prices on the generation side.

The drought is "going to drag on full-year 2013 earnings", one investment source said.

In addition, some energy sector commentators have questioned MRP's decision to actively pursue geothermal projects in Chile and the United States as opposed to passively investing via an investment fund structure as it has done in the past.

Energy analyst Molly Melhuish said investors needed to be aware the strategy shifts MRP's risk profile away from a "safe, utility-type investment prospect", which is how the firm is being marketed to investors.

Countering those negatives is the company's position within the New Zealand market, with MRP generating and selling about a fifth of the country's power, a position that gives it fairly defensive earnings.

"Mighty River Power is a high-margin business," said Phil Anderson, an energy analyst at Devon Funds. "If demand takes the upside or downside case, Mighty River Power will still make a profit."

He said the firm was also in the final stages of wrapping up a decade-long capital investment phase, in which it built geothermal plants in the Central North Island region.

Anderson said that should free up funds within the business which MRP could use to pay dividends to shareholders, in the model of Contact Energy.

Contact, the last state-owned asset to be listed, declared an interim dividend of 11 cents per share, representing 87 per cent of the firm's underlying earnings and an earnings yield of 6.1 per cent.

One fund manager said he expected MRP's dividend yield to be in the same ballpark.

Contact's own IPO hangs as a spectre over the MRP sale. The firm listed in May 1999 at $3.67 a share, a level it would take more than two years to regain after being heavily sold down after its debut. The firm's shares peaked at $9.99 just ahead of the global financial crisis, and recently traded at $5.38 apiece.

Head of Fisher Funds, Carmel Fisher, said the investment decision could be made only once the investment statement and prospectus were released. There's no indication of when that will be exactly, but it will be after pre-registration closes on March 22.

Fisher cautioned investors against making assumptions before a proper analysis of the financials has been done, such as the belief it would trade as a high-yielding infrastructure stock.

"If you're interested in yield, there may be other assets that can offer a better yield with a lower risk profile," she said. "Obviously it's a large company and you can look at its history and gain some certainty and comfort from that, but it's the outlook that's important."

That advice is backed up by Grant Williamson, a director at South Island brokerage Hamilton Hindin Green, who said: "Normally the worst investment decisions are when you're caught up in the hype".

One institutional fund manager said would-be investors faced no penalty from pre-registering for the shares, but the responsibility for actually buying them would fall on their shoulders.

"Register and get the documents, then read them . . . they're not going to be that difficult," he said. "If you can't be bothered to read these documents, stick with term deposits."

Beyond the fundamentals of MRP, investors also need to gauge how sensitive they are to risk, and whether buying shares at all is a sound investment choice.

Financial adviser Alan Borthwick said by buying MRP, first-time equity investors would expose themselves to single stock volatility.

That makes it a less suitable investment for those saving for a short-term goal, such as a deposit on a house, but it would suit those who don't need quick cash and are saving for the long term.

"People need to go in with their eyes open, and know how shares work," Borthwick said.

On a wider analysis, Borthwick is positive about the MRP sale, calling it a relatively inexpensive way for retail investors to educate themselves about equity markets.

"Sure, people aren't immediately going to go from buying shares in this IPO to investing in start-ups, but hopefully it reverses the trend of people thinking shares are bad."

- BusinessDay.co.nz

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