Yovich & Co. Weekly Update - 11 February 2013

Feb 11, 2013 | Commentary

This Weeks Themes

• The NZ market took a breather last week after three consecutive up weeks with unemployment figures showing a shrinking participation rate in the labour market.

• The Aussie market continues its move higher with better employment figures giving the market a lift and sentiment that Chinese economic growth is gaining momentum.

• The Dow closed the week slightly in the red, just below the significant 14,000 level while Tech stocks lead the NASDAQ to its highest level since the 90's Tech Bubble.

• Disappointing employment figures put downward pressure on the NZD.

Investment News

NZ Energy Sector: In preparation for the possible listing of Mighty River Power in the 2nd Quarter, First NZ Capital has issued a special research overview of the NZ Electricity sector, below is my summary.

Generation: In 2012 approximately 70% of generation came from renewable generation. Hydro generation was the largest generation type, accounting for over half of total generation (52%), followed by gas fired thermal (22%), geothermal (13%), gas fired coal (6%) and wind (5%). Generation is dominated by a small number of vertically integrated generator retailers ("gentailers"). Two of these companies are publically listed on the New Zealand Stock Exchange; Contact Energy (CEN) and Trustpower Limited (TPW), while the remainder are State Owned Enterprises ("SoE's"); Genesis Energy, Meridian Energy and Mighty River Power. There is a structural imbalance between generation and consumption due to the majority of the hydro generation centred in the South Island while consumption is based in the upper North Island. Contract Energy and Mighty River Power are currently constructing geothermal plants in the central North Island which will add to generation in the North Island.

Transmission: Transpower owns and operates the national network. Their role as network operator comprises two functions; system operations and asset management. Their systems operator role requires them to co-ordinate the supply and demand of electricity, whilst their asset management role requires them to maintain and upgrade the national network.

Key Issues:

Oversupply of Generation - Unusual wet period over the past four years, little to no demand growth, commissioning of new developments and the possibility of a staged closure of the Tiwai Aluminium Smelter, continues to place downward pressure on prices.

Retail Competition - As a result of the suppressed wholesale electricity price, the mandated asset swap between Genesis Energy and Meridian Energy, and the government funded switching campaign, the retail market remains highly competitive.

Volatility of earnings - Due to the reliance on hydro generation and variation in rainfall (and NZ's limited hydro storage) the wholesale price can fluctuate materially in a matter of months. This can lead to significant volatility in the profitability of the "gentailers" although shouldn't impact the longer term profit trend.

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Jarrod Goodall



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