Company: Genesis Energy Limited
Sector: Diversified energy
Overview: In the beginning the Government listed Mighty River. These were dark days for investors as it almost instantly traded below the issue price. But then the Government said, 'let there be Meridian' and light was returned to the investment landscape with investors in Meridian up around 10 per cent since listing. Now the book of Genesis has been written and investors will be rightly tempted by what some call forbidden fruit.
Pros: Genesis is perhaps the most diversified of the listed power companies. The company has the largest retail client base in both the electricity (27 per cent market share) and gas (44 per cent market share) markets with over 650,000 customers overall. It is the only power company with direct exposure to oil and gas fields, holding a 31 percent interest in the Kupe oil and gas field in the Taranaki basin. The company also has a diversified energy production stable, with 32 per cent coming from hydro and the bulk of the rest coming from its Huntly assets. The key Huntly asset is a natural gas-powered turbine known as Unit 5 which can be ramped up or down depending on the supply and demand mix at the time. This means that when conditions are dry and lake levels are low Genesis has the ability to ramp up production to take advantage of the likely higher wholesale electricity prices.
Cons: The same old cons appear for Genesis that we had for Mighty River and Meridian. Tiwai Point and the Labour and Greens NZ Power policy loom large, with weather always a factor. Given recent poll results, Tiwai is the most pressing issue investors should consider. It is worth noting that when Meridian, Tiwai's electricity provider, last updated the market it stated that usage at smelter was up 3.8 per cent in the 8 months to February 2014 (compared to the same period in 2013). Rio Tinto also reported an improvement in earnings from its aluminium division helping to dampen talk of closure. The downside from any change in government is hard to judge given the lack of specifics in any policy announcement, however, it appears most of the vitriol coming from the left relates to usage of water in the hydro stations meaning Genesis could be less exposed than some of its listed counterparts.
Price performance: The price range set for the offer is $1.35 to $1.65. Retail investors will be exceedingly pleased to know that the final price will be set before they decide whether to invest.
Investment outlook: The indicative price range makes for a very attractive 2015 gross dividend yield of 13.5 to 16.5 percent. The bonus share offer sweetens the deal with shareholders who hold for a year getting another share for every 15 they hold up to a limit of 2,000 bonus shares. Genesis could also be seen as a hedge as it will outperform in dry years when it's already listed peers will suffer.
*A Broker's View is written by Grant Davies, Authorised Financial Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.
- Fairfax Media