Yovich & Co. Weekly Update - 16 February 2015

Feb 16, 2015 | Commentary

Changes in Market

 

 

 

This Week’s Themes

  • The impressive eight week winning streak came to an end last week with the New Zealand market slipping by a small margin. The high yielding utility stocks finally levelled off after a very strong 6 months.

  • There was a late surge on Friday in Australia as global markets reacted positively to a cease fire in Ukraine, and expectations that the Greek Government was close to accepting the terms of further deals to reduce their sovereign debt burden. The Aussie market closed close to a post GFC high.

  • U.S. indices were pushed higher by positive results in the tech sector. The NASDAQ reached its highest level since the 2000 information technology bubble with Cisco Systems announcing profit and sales that was at the higher end of predictions.

  • The relative strength of the New Zealand economy and the interest rate differential of 1.25% encouraged the Kiwi to hit a post Float record against the Aussie. The last time the New Zealand Dollar was worth more than 96 cents Australian was in 1975.

Investment News

Contact Energy (CEN.nz) – Investors Surprised by New Strategy.

Leading up to the result announcement on the 16th of February, most investors and commentators expected that the additional free cash flow that Contact was generating was going to be returned to investors. Instead of announcing an increase in dividends, the company announced a strategy of growth by looking for international opportunities to leverage off of their expertise in renewable energy, and more specifically in geothermal generation. The market reacted swiftly with the share price down almost nine percent on Monday as yield-sensitive investors exited to find more certain cash flow investments. 

The Investor Presentation highlighted that the New Zealand market is unlikely to provide growth opportunities and to add to shareholder value the only other option for growth is international expansion. They offered the following reasoning to explain their competitive advantage and how this will relate to improved shareholder value: 

  • Geothermal is Contact’s area of strongest capability.

    • A dedicated, internationally recognised subsurface team in Wairakei.
    • Operational experience in one of the world’s longest producing geothermal regions.
    • Recent success in construction management, consenting and stakeholder engagement.
    • Particular strength in engaging with indigenous communities. 
  • Contact are investigating options to leverage their skills and experience in international markets.

    • Any initial investments expected to be funded by free cash flows. 
  • A business delivering a strong yield and supporting renewable growth overseas is an attractive investment.

 This growth strategy has certainly changed the investment proposition and differentiated themselves from the other domestic focused power companies. FNZC believe that the market has over-reacted to this news and are valuing Contact on a discounted cash flow methodology of $6.41 and a one year price target of $6.62. The current price of $6.36 does represent a discount to these values and the gross yield of 5.7% is still in-line with the yield of Mighty River Power. We believe that at this price it is good value to be buying Contact to gain access to a company that has high expectations for continued growth and delivering added shareholder value. Contact remains on our preferred list of investments.

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Jarrod Goodall



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