Power policy a 'hand grenade' for listed firms

TIM HUNTER
Last updated 13:58 22/04/2013

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The Labour and Green parties' power policy could wipe as much as $1.4 billion off the values of Contact Energy and Trustpower, says a Forsyth Barr analyst.

In a research note published today, analyst Andrew Harvey-Green described the Opposition's policy as a "hand grenade" with far-reaching implications for the industry.

The policy aims to reform the electricity market by creating a single government-controlled buyer for electricity and reducing the cost of power for households by a total of $700 million a year.

Harvey-Green said the scheme would cut revenue and profits for Contact and Trustpower, reducing their value by up to $869m and $555m respectively.

However, the effect on the companies' share prices should not be as great, he said, because the Labour/Green parties might not win the next election and if they did it would take four or five years to implement the plan.

Adjusting for risk and time, Harvey-Green estimated the proposal amounted to a hit on Contact's share price of 25c a share and on Trustpower's of 38c a share.

Both companies' shares took a severe beating last week, but Harvey-Green said the market reaction was probably overdone.

"Both CEN and TPW appear to have been oversold over the past two days." he said.

"We have lowered our target prices to $6.00 (-10 cents-per-share) and $8.35 (-40 cents-per-share) for CEN and TPW respectively to take account of the risk of a single buyer model being adopted. However, we believe both companies are good investments and have upgraded our TPW recommendation to buy and maintained our buy recommendation on CEN."

Contact shares were trading up 2c this morning at $5.33, while Trustpower was down 1c at $7.17.

Harvey-Green said he was prevented from publishing his views on the implications for Mighty River Power's share float, which opened last week.

"We're in blackout at the moment so can't make any comment," he said.

According to today's NZX market capitalisaion, Contact is valued at $3.9b and Trustpower at $2.3b.

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- BusinessDay.co.nz

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