Investors advised to stick with MRP

JASON KRUPP
Last updated 05:00 20/06/2013

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Investors sweating the slide of Mighty River Power shares can take some solace in Forsyth Barr's first brokerage report on the firm, which recommends clients should hold on to the shares.

The broker sees the electricity firm as a solid cash generator despite the shares recently trading at $2.31 a piece - 15 per cent below where they made their stockmarket debut on May 10.

In that time trading volumes have got down to more-normal levels as speculative positions have cleared out in favour of buy-and-hold investors, dropping from the 25 million shares traded on the first day to just over half a million yesterday.

Forsyth Barr analyst Andrew Harvey-Green values the shares at $2.18 apiece on a discounted cashflow basis, but includes a 20c per share dent from the Labour-Green single-buyer proposal.

He's targeting the share price to be $2.35 in 12 months, boosted by the additional supply from MRP's Ngatamariki geothermal station, which will hit full production capacity by the end of this year.

That will take 2014 earnings before interest, tax, depreciation, amortisation and fair-value movements to $505 million - $7.5m above MRP's own prospectus forecasts.

According to the brokerage, that should see the share price gain 1.3 per cent in a 12-month period, and with a next-dividend yield of 5.6 per cent, deliver a total return of 6.9 per cent.

"Whilst MRP's growth and development phase is coming to an end, MRP is moving into a new phase of focusing on generating cash to be returned to shareholders," Harvey-Green said.

Still, the outlook is not without its challenges.

Harvey-Green says the firm will still have to cope with soft overall demand for electricity, expected to fall further as consumers swap to non-grid alternative supply such as solar power.

Forsyth Barr is, however, betting the Tiwai Pt smelter will not shut down in the medium term because of its take-or-pay contract with Meridian, and the rehabilitation costs it faces if owner Rio Tinto chooses to exit New Zealand.

MRP is also exposed to hydro-dam water flows, with all its dams on the Waikato River, a concern in years of drought such as this one.

Lastly, Mighty River Power, like all electricity firms, faces regulatory risk, principally from Labour and the Greens.

"The implementation of such a policy is likely to have a material impact on MRP's value," Harvey-Green said. "However, there are several hurdles to be overcome before it gets implemented, hence our risk-adjusted value impact of 20c per share."

He noted the firm is also likely to incur a $7m-a-year cost from new transmission pricing rules, which the Electricity Authority is looking to introduce from 2018 onwards.

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- BusinessDay.co.nz

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