Genesis offer 'excellent value'

JAMES WEIR
Last updated 05:00 01/04/2014

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Genesis Energy shares could be worth almost $2 at the top end of broker's estimates, well above the government's offer price of $1.55 a share announced last week.

Genesis is one of the markets biggest generators and the largest power retailer. It also had a valuable cornerstone stake in the gas-condensate Kupe field, which was unique among the listed power companies and a key part of its earnings base.

A report by Woodward Partners made public yesterday, rated Genesis a "buy" with a value ranging as high as $1.93, and said at the offer price Genesis has the strongest forward dividend yield of any top 50 listed company.

The offer price offered investors "fundamentally excellent value" Woodward Partners analyst John Kidd said, and dividends "without equal".

At the offer price, Genesis presented a forecast gross dividend yield of 11.5 per cent for the 2014 financial year and 14.3 per cent in the following year, which Kidd said was "deeply compelling".

Woodward Partners gave a spot valuation for Genesis of $1.75 a share and compared with peers in the market, it had a value range of $1.66 to $1.93 a share. The "valuation band" meant an average 15 per cent premium to the offer price. Retail bonus shares added another 6.7 per cent to the 12 month return.

And in the short-term dry weather and low hydro lake levels, now 76 per cent of average, would be good for Genesis. Kidd said the forecasts in the Genesis offer document were based on a normal or "mean" year for water inflows to hydro lakes.

"We are now in a situation that is significantly south of that (mean)," Kidd said. Genesis tended to make most of its money in the winter months, irrespective of lake levels.

"So when prices do spike or trend up, as is the case currently, that will be to the benefit of Genesis," Kidd said.

It looked like it could be a good period for Genesis financially, because of the dry spell, "but conditions can change very quickly - it only takes a short spell of foul weather to change the situation materially," he said.

Another broker report also out yesterday, from Edison Research, suggested Genesis had a fair value price range of $1.79 to $1.97 a share, with a mid point of $1.88, which was about 21 per cent above the government offer price.

Edison analyst Tim Heeley said the government appeared to have struck the right balance with the Genesis float, with the high yields being the most attractive part of the offer.

By comparison, the highest-yielding power company stocks are Meridian and Mighty River offering comparatively low gross dividends of 9 per cent, Edison said.

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Genesis' 31 per cent stake in the Kupe oil and gas field gave the company a diversification away from the domestic electricity sector and was a source of "potential value uplift" in the medium term.

"The nice thing about Kupe is the longevity of the asset for the gas field . . . with condensate and high value oil and LPG and gas," Heeley said. A third of Genesis' forecast dividend stream for the next five years would be supported solely by oil and LPG cashflow, Edison said.

Genesis' share of Kupe was worth about $584 million or 58 cents a share for the producing part of the field and another 14 cents a share for the potential "upside" from further development.

- BusinessDay

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