Is it worth investing in Genesis?

16:00, Mar 07 2014
Bill English
FOR SALE: Finance Minister Bill English announces the details of the Genesis Energy selldown.

The partial sale of Government-owned assets was targeted at raising cash for its coffers but was also aimed at bringing fresh blood and money to the sharemarket.

With Genesis now on the chopping block we've taken a look at the previous asset sales of Mighty River Power and Meridian to see how they have stacked up for those mythical mum and dad investors the National Government needed to buy in to give the sales an everyman gloss.

We haven't looked at Air New Zealand as these shares were sold to brokers; mums and dads were already able to buy Air New Zealand shares before the Government floated another 20 per cent of the national airline.

Genesis Energy Auckland headquarters.

Mighty River Power
IPO price: $2.50
High: $2.62
Low: $1.94
Dividend: 7.2c
Imputation credit: 2.8c
Incentive: One loyalty share per 25 shares held for two years

Mighty River Power kicked off the Government's contentious partial asset sales programme floating on the New Zealand stock exchange, the NZX, on May 15 2013.

In the lead up to the float investors' appetite for energy company shares was strong. A website set up to take registrations of interest crashed from a glut of hits after the Government announced a sweetener to the deal.


Genesis Energy Huntly powerstation.

The sweetener came in the form of "loyalty" shares. Kiwi-based investors in MRP were eligible for one additional share for each 25 shares purchased - up to a maximum of 200 bonus shares - if they held onto MRP stocks for 24 months.

MRP saw giddy pre-registration numbers with 440,000 indications the electricity generator and retailer would appeal to mums and dads.

What transpired fell short with 113,000 new shareholders jumping into bed with the Government on May 15.
The plummeting interest was largely blamed by the Government and share brokers on some well-targeted politicking by Labour and the Greens, or economic sabotage depending on your point of view, who introduced the spectre of a central price-setting agency putting a choke-hold on the industry.

The number of Kiwi mums and dads who bought in to MRP despite the uncertainty is almost impossible to measure with accuracy but there were a number of first time share buyers who purchased MRP.

Remember, encouraging new investors into the market was a key plank of Prime Minister John Key and co's argument in favour of the partial asset sales.

NZX statistics show 76,160 new common share numbers (CSN) were created for the MRP sale. Common share numbers are unique numbers allocated to shareholders to identify them.

Clearly some mum and dad MRP shareholders would have already had CSNs, and some may have had duplicate CSNs produced if they failed to note an existing number on their share application, but new meat on the market buying MRP was significant.

And how have the first time investors fared? The new meat is possibly feeling a bit tenderised from the share price post float.

After signing up without knowing what price they would be paying come float day mum and dads have seen the $2.50 they paid undercut.

Apart from a rapid bump immediately after the offering, when institutions cashed out at what turned out to be a never seen again peak, MRPs share price has relentlessly tracked down.

The share price has lingered around $2 of late, languishing somewhat similarly to Labour and the Greens in the polls.

But hey - you've still got free shares coming right?

If you hold on until May next year, yes you do.

To get the maximum amount of freebie shares an investor needed to purchase 5000 MRP stocks. This would have cost you $12,500 on float day, bringing your total number of shares come May 15, 2015 to 5200.

Assuming MRP shares stay around $2 your 5200 shares that cost $12,500 will be worth $10,400.

But what about dividends, I hear MRP shareholders cry?

Dividends are basically a share of a company's profits paid out to its owners - its shareholders.

MRP paid a 7.2c dividend per share in September year with an "imputation credit" of 2.8c bringing a return of $500 before tax for your current shareholding of 5000 shares.

Imputation credits are credits given to shareholders for tax the company has paid essentially on your behalf since you are a partial owner of the company. The credit makes sure you are not double paying tax on the company's profits.

What's important to know about imputation credits is that they mean more money in the hand for you.
Your dividends are taxed to make up a shortfall between the company tax rate of 28 per cent and the personal tax rate, leaving roughly $335 in your pocket.

At present the value of your shares plus the dividend is $10,335 versus a cost of shares of $12,500.
Bonus shares and further dividends are coming your way.

MRP announced on February 26 it would pay an interim dividend of 5.2c on March 31, but at present you are $2165 behind.

IPO price: $1
High: $1.11
Low: 0.88c
Dividend: 4.19c
Imputation credit:1.467c
Incentive:$1 up front 50 cents to pay

The Government floated 49 per cent of Meridian Energy on the NZX on October 20.

The previous asset sale of Mighty River drove the initial offer price of Meridian down to the bottom of the indicative price range with a total price of $1.50.

The Government stayed clear of offering retail investors bonus shares and instead went for a down payment plan. Investors coughed up $1 to secure a slice of the energy company with 50 cents due in May next year.

In contrast to Mighty River the Government capped the prospective price at $1.60 before the shares were floated taking away uncertainty from mum and dad investors who perhaps were still feeling stung from MRP's gutsy $2.50 per share price.

Meridian listed at the $1 down payment price.

Arguably the 'put money down pay the rest later' and low share price strategy failed to overcome investor nerves. A total of 62,000 invested in the media friendly energy company.

The number of new common share numbers was 18,600 this time around.

As one broker put it, new investors were "once bitten twice shy".

Or there's the take from Finance Minister Bill English who said:

"Meridian has attracted a different mix of investors than we saw with Mighty River Power earlier this year. While demand was strong and broad based, overall we saw fewer retail investors bidding for larger parcels of shares."

Meridian's debut aped the performance of MRP - there was post-float flurry - then the share price swiftly headed south.

It bottomed out at 88c in December last year, recovering to trade at about $1 of late.

If you purchased 5000 Meridian shares you would have paid $5000 so far with a further $2500 due next year. Essentially the Government has given you an interest free loan of $2500 to encourage you to buy in.

Meridian will be paying its shareholders dividends later this year but there are no freebie shares coming your way if you hold onto the stocks.

The company has announced an interim dividend of 4.19c, with an imputation credit of 1.467c, due to be paid on April 15.

After tax is paid to bridge the gap between the company and personal tax rates you should get about $189 from your 5000 shares.

Meridian is a little bit trickier as you have got $7500 worth of shares for $5000 at this point technically putting you ahead from the get go.

When you add in the dividend you are ahead $2689 but who knows what will happen to Meridian's share price once the extra 50c is added next year and the shares will be worth, on paper, $1.50.

You will also be required to pay the extra $2500 at this point. Meridian shareholders will be praying the market thinks the shares are worth the full price, or maybe more.

Putting the numbers aside, unless you are day trader who sits at home trying to catch and ride waves of market volatility or you are going to sell your shares, the share price from day to day doesn't affect you except perhaps mentally.

Your loss is only realised when you sell.

Shares like those of infrastructure assets and energy companies have traditionally been seen as long-term plays so you buy and hold. And hold. And collect dividends along the way.

Hands up who's in for Genesis?

Fairfax Media