Capitalised Dividend Valuation (FY2021 & FY2022 view) Part 2b: Calculation
This is an alternative Capitalised Dividend valuation to my post 1443, now using a 5.0% gross yield for utilities, as I have just done in my recent Contact Energy valuation.
So I can calculate a capitalised earnings valuation for MCY as follows.
FY2021: 23.41c / (0.05) = $4.68 (based on averaged 'dps')
FY2022: 23.67c / (0.05) = $4.73 (based on averaged 'dps')
However, this valuation does not take into account the any not yet operational wind farms for which the capital is already built into today's balance sheet. Adjusting for that (my post 1442) my fair value for MCY today is:
FY2021: $4.68 x 1.230 = $5.76
MCY closed on the market on Friday 12th August 2022 at $6.50. That means as at 12-08-2022, I see MCY as overvalued, by 12.8%.
MCY closed on the market on 30th September 2021 at $6.50 (same price as above). That means as at 30-09-2021, I saw MCY as overvalued, by 12.8%.
SNOOPY
'Thin Air' capital created since the GFC (FY2022 Perspective)
Time to update my table
|
Reval. Hydro & Thermal Assets ($m) |
Reval. Geothermal & Other Generation Assets ($m) |
Reval. Wind Generation Assets ($m) |
Total Revaluation ($m) |
Post tax New Capital Per Share ($m) |
Pre Tax Revaluation ($m) |
Pre Tax New Capital Per Share (c) |
2009 |
0 |
170.987 |
N/A |
170.987 |
12.2 |
244 |
17.4 |
2010 |
200.900 |
60.250 |
N/A |
261.150 |
18.7 |
373 |
26.6 |
2011 |
153.300 |
135.275 |
N/A |
288.575 |
20.6 |
412 |
29.4 |
2012 |
119.520 |
2.880 |
N/A |
122.240 |
8.7 |
170 |
12.1 |
2013 |
30.960 |
26 |
N/A |
57 |
4.9 |
79 |
5.6 |
2014 |
4 |
25 |
N/A |
29 |
2.1 |
40 |
2.9 |
2015 |
356 |
0 |
N/A |
356 |
25.4 |
497 |
35.5 |
2016 |
? |
? |
N/A |
99 |
7.1 |
137 |
9.9 |
2017 |
0 |
38 |
N/A |
38 |
2.7 |
52 |
3.7 |
2018 |
0 |
40 |
N/A |
40 |
2.9 |
55 |
3.9 |
2019 |
109 |
71 |
N/A |
180 |
12.9 |
250 |
17.9 |
2020 |
182 |
31 |
N/A |
213 |
15.2 |
296 |
21.1 |
2021 |
396 |
279 |
N/A |
675 |
48.2 |
938 |
67.0 |
2022 |
100 |
1 |
110 |
211 |
15.1 |
293 |
20.9 |
Total |
|
|
|
2,741 |
196.7 |
|
274 |
less Special Dividends Declared (FY2015-FY2018) (per share) |
|
|
|
-229 |
-15.4 |
|
add Snowtown Windfarm dividend (FY2021) |
|
|
|
55 |
3.9 |
|
add Hudson Geothermal sale Profit (FY2021) |
|
|
|
41 |
2.9 |
|
add Tilt Stake Gain (FY2022) |
|
|
|
404 |
28.9 |
|
equals Residual Thin Air capital |
|
|
|
|
217 |
|
Notes:
1/ Capital per share figures assume 1,400m shares on issue throughout the whole comparative period.
2/ 30% tax rate assumed up until FY2012. 28% tax rate assumed from FY2012 forwards.
3/ I notice that after FY2014 the break down in the annual report between 'Hydro & Thermal Assets' and 'Other Generation Assets' has ceased in the 'Property Plant & Equipment table. This detail was reinstated in FY2017, if you looked at 'Assets at Fair Value' sub note under the subsequent annual report notes on 'Property Plant & Equipment'.
4/ Since I am counting 'thin air capital' as an extra return over and above dividends, I feel it is appropriate to look at the 'post tax' effect of the new thin air capital. That aligns more closely with the post tax effect of dividends. Dividends 'post tax' are what shareholders get in their bank account.
5/ I have removed the special dividends declared over time from my analysis, as these may been seen as a method of balance sheet optimization by paying back excess 'thin air capital' (ref post 1440).
6/ For the calculation of the 15.4cps special dividends paid, see my post 1318 on this thread.
7i/ Mercury acquired 19.9% stake in Tilt Renewables acquired for $144m in FY2018. This had a market value of $130m at EOFY2018.
7ii/ During FY2019 Mercury subscribed $55m to a 'Tilt Renewables' capital raising. The book value of Mercury's share of Tilt increased to $249m over FY2019.
7iii/ During FY2020 Mercury acquired a seat on the Tilt board. This meant that Mercury could exert 'significant influence' over Tilt. Consequently accounting rules forced the Tilt stake to be reclassified in the balance sheet as an 'associate' rather than an 'investment'. The Tilt 'associate shareholding' was valued at $230m on the books at EOFY2019.
7iv/ Mercury subsequently sold their 19.9% stake in Tilt for $608m
7v/ The Tilt sale price was adjusted down to account for a $5m pre-sale dividend already booked.
7vi/ The 'thin air' capital gain on this series of transactions was therefore:
$608m - $5m - $55m - $144m = $404m
This $404m figure is at variance with the profit figure of $376m in AR2021 p63, because I am basing my profit calculation on original cost, not book value at the time of sale.
---------
217cps x 1,400m shares = $3,038m of retained 'hidden value' 'Thin air capital' over the years.
Of course not all of this still exists because it has been used to build both the Nga Awa Purua (FY2010) and Ngatimariki (FY2013) power stations over the years, the Turitea wind farm, and the acquisition of the NZ wind farm assets of 'Tilt Renewables'. These constructions and acquisitions were built using a combination of new equity (the infamous 'thin air capital') and borrowings. We should also bear in mind that some of this thin air capital may be needed to retain the credit rating of the company. Put simply, the more capital the company have, the less borrowings they need. So some unspent thin air capital could contribute to a better credit rating for the company.
Notwithstanding the large amount of thin air capital created since 2008, 2021 foresaw the biggest spend ups so far, signing up to buy the biggest NZ windfarm assets back off Tilt's new owner, and also signing up to buy the retail assets of Trustpower (The transaction went through on 3rd August 2021, which was in FY2022).
And how much did shareholders have to stump up to make these acquisitions? Nothing. And how much was the debt ratio of the company increased so that borrowings could pay for these acquisitions? Not at all, until the arrival of the ex Tilt windfarm assets which reduced the equity ratio by 3.5 percentage points. However, Mercury has raised their EBITDAF profit target by $100m as a result of this Tilt acquisition.
There is the power of 'thin air capital' for you.
SNOOPY
Equity Ratio FY2013 to FY2022
The following is a break down of the equity ratio of what was once 'Mighty River Power' and is now 'Mercury Energy' since float time.
|
Equity (A) |
Assets (B) |
Equity Ratio (A)/(B) |
FY2013 |
$3,182m |
$5,802m |
0.5484 |
FY2014 |
$3,219m |
$5,689m |
0.5658 |
FY2015 |
$3,337m |
$6,058m |
0.5508 |
FY2016 |
$3,315m |
$6,085m |
0.5448 |
FY2017 |
$3,308m |
$5,997m |
0.5516 |
FY2018 |
$3,286m |
$6,091m |
0.5395 |
FY2019 |
$3,537m |
$6,484m |
0.5455 |
FY2020 |
$3,739m |
$6,885m |
0.5431 |
FY2021 |
$4,186m |
$7,978m |
0.5247 |
FY2022 |
$4,752m |
$9,660m |
0.4919 |
Notes
1/ The Tilt renewables NZ assets acquisition was not finalised until August 2021. This means FY2022 is the only entry above that includes the ex-Tilt renewable windfarm assets.
SNOOPY
Net Equity At Cost: FY2022 Perspective
In order to work out the capital efficiency of Mercury, it is first necessary to determine the net equity within Mercury, less all the generation asset revaluations. Assets are funded by both equity and debt. This means we must back out the equity funded component of the generation asset revaluations only, by taking it off the quoted 'net asset backing'.
|
Generation Assets Book Value {A (AR Note P,P&E) |
Generation Assets At Cost {B} (calculated) |
Generation Assets Revaluation {A}-{B} |
Equity Ratio EOFY {C} |
Total Net Assets {D} (from balance sheet) |
Total Net Assets Revaluation Adjusted {D}-{C}x{{A}-{B}} |
FY2018 |
$5,215m |
$2,313m |
$2,902m |
0.5395 |
$3,286m |
$1,720m |
FY2019 |
$5,347m |
$2,358m |
$2,989m |
0.5455 |
$3,537m |
$1,907m |
FY2020 |
$5,575m |
$2,460m |
$3,115m |
0.5431 |
$3,739m |
$2,047m |
FY2021 |
$6,362m |
$2,495m |
$3,867m |
0.5247 |
$4,186m |
$2,157m |
FY2022 |
$7,723m |
$3,818m |
$3,905m |
0.4919 |
$4,752m |
$2,831m |
This information is needed for 'Buffett Test 3', should I choose to run it. It is also useful when working out 'Return on Equity' at cost.
SNOOPY
Thin Air Capital, Special. Div. Adj. (FY2022 view)
Post 1456 was useful to put on record, showing the tremendous amount of thin air capital that was generated from the public accounts available for scrutiny. Nevertheless it was the partial privatisation of Mercury Energy (or Mighty River Power as it was then), that put in the spotlight what capital structure for the company would be appropriate going forwards, following the public partial float.
I am going to use the assumption that, during the company float in FY2013:
i/ With consideration of how much new capital (if any) would be needed going forwards AND
ii/ The completion and commissioning of the all new Ngatamariki geothermal station fully costed in that year, AND
iii/ The listing of the company in April being so close to the end of the financial year in June.
then this meant that Mercury considered itself 'capital optimised' at the EOFY2013 balance date. Using the balance sheet from that year, we can therefore calculate an 'optimised gearing ratio' for the company:
Optimised Gearing Ratio (OGR): (Total Liabilities)/Total Assets): $2,620m / $5,802m = 45%
Once we have settled on this optimised 'base case', this means it is only the 'thin air capital' generated after that time that counts as possible future power station development capital. That is the basis for my table of numbers below.
I consider that the special dividends, paid over the years from FY2015 to FY2018 inclusive, represented a 'capital optimisation' exercise for the company. This means I must modify my 'thin air capital' table by removing the total special dividends paid from the summed 'thin air capital' created by revaluations.
Year |
New Thin Air Capital |
Deferred Tax Effect Multiplier |
Effective New Thin Air Capital |
Special Dividend Paid |
Dividend Tax Effect Multiplier |
Surplus Capital Returned |
Surplus Capital Returned per Share |
FY2014 |
$40m |
0.72 |
$28.8m |
$0m |
N/A |
$0m |
0c |
FY2015 |
$421m |
0.72 |
$303.1m |
$69m |
1.0 |
$69m |
5.0c |
FY2016 |
$136m |
0.72 |
$97.9m |
$34m |
1.0 |
$34m |
2.5c |
FY2017 |
$48m |
0.72 |
$34.6m |
$56m |
0.72 |
$40m |
2.9c |
FY2018 |
$55m |
0.72 |
$39.6m |
$70m |
1.0 |
$70m |
5.0c |
FY2019 |
$250m |
0.72 |
$180.0m |
$0m |
N/A |
$0m |
0c |
FY2020 |
$296m |
0.72 |
$213.1m |
$0m |
N/A |
$0m |
0c |
FY2021 |
$938m |
0.72 |
$675.4m |
$0m |
N/A |
$0m |
0c |
FY2022 |
$293m |
0.72 |
$211.0m |
$0m |
N/A |
$0m |
0c |
Total |
|
|
$1,783.5m |
$229m |
|
$213m |
15.4c |
Notes:
1/ A post tax effect multiplier of 1 indicates that tax has already been paid on this dividend
2/ A post tax effect multiplier of 0.72 on the dividend indicates that the dividend was not imputed and 28% tax needs to be paid.
3/ The 'New Thin Air Capital' is 'Asset Revaluations' less 'Impairments'.
4/ Surplus capital returned per share assumes 1,400m shares on issue.
5/ By removing the special dividend total from the incremental 'thin air capital', this means that in any complimentary dividend analysis, I should instead count these special dividends as 'regular dividend income', (because it no longer represents company money that can be used in any other way.)
6/ I have considered whether I should represent the 'thin air capital' on a 'declared dollar value basis' or a 'deferred tax adjusted basis'. I have decided to use the latter method. This is the more conservative approach, and will mean no adjustment would be necessary, should that 'deferred tax bill' ever be legislated to be collected.
I consider that the reduction in 'thin air capital' from the special dividend should be looked at from a 'company perspective' (Special Dividend paid), not from a 'shareholder perspective' (Surplus Capital Returned). This is because the amount of the payment is determined by the company based on the company capital remaining as a result of the quantum of the special dividend payment going out (i.e. what the shareholder ends up with in their hands is irrelevant).
The remaining thin air capital on the balance sheet is therefore: $1,784m - $229m = $1,555m
But how has this 'thin air capital' been deployed, and is there any left? That's next.
SNOOPY
Spending Thin Air capital (FY2022 view)
Quote:
Originally Posted by
Snoopy
The remaining thin air capital on the balance sheet is therefore: $1,784m - $229m = $1,555m
But how has this 'thin air capital' been deployed, and is there any left? That's next.
New projects and acquisitions are funded by a combination of equity and debt. Using the 'Optimised Gearing Ratio' (OGR) for the company, and knowing the future investment commitments already inked, we can figure out how much investment the remaining 'thin air capital' on the books can support.
Before we do that though, there is a bit more 'equity trading capital' that we can add to the 'thin air capital' equity pile.
Mercury Significant Asset Sales: 2019-2022 |
Profit |
Reference |
Snowtown Windfarm (Aus) Disposal Dividend (from Tilt) |
$55m |
(AR2021 p32, p35) |
Hudson Geothermal Power Station (USA) Sale |
$41m |
(AR2021 p36, p52) |
Tilt 19.9% stake sale |
$367m |
(post 1431, AR2021 p63) |
Metrix Metering Business sale |
$177m |
(AR2019 p71) |
Total equity capital raised |
$640m |
|
The net total of this 'thin air capital' (post 1459) plus 'equity trading capital' that has been accumulated could theoretically support extra debt 'd'. If we use the company's optimised gearing ratio.of 45%, then we can calculate 'd' as follows:
$1,555m+$640m = $2,195m ('thin air capital + 'equity trading capital')
'd' / $2,195m = 45% => d= 0.45x $2,195m = $988m
We thus have a total funds available for investment an amount of:
$2,195m (equity) + $988m (debt) = $3,183m dollars,
(while still staying within Mercury's own optimised balance sheet guidelines.)
Offsetting that gain, the following significant capital investments have been committed to from FY2019 to FY2022
Mercury Significant Capital Investments: Announced 2019-2022 |
Cost |
Reference |
Turitea Windfarm (Stage 1 only) |
$256m |
(AR2019 p15) |
Turitea Windfarm (Stage 2 only) |
$208m |
(PR2021 p14) |
ex-Tilt 'NZ Located' Wind Farms |
$797m |
(AR2021 p35) |
Trustpower Retail Business |
$441m |
(AR2021 p35) |
Total capital budgeted spend |
$1,702m |
|
Of these investments, the Turitea North Wind Farm became operational in the second quarter of FY2022. The Tilt wind farm portfolio was under the control of Mercury in August 2021 (in Q1 FY2022). were operating by the time the company balance date closed off (30-06-2021), and the old Trustpower retail customer base did not come on board until May 2022. The expected uplift in EBITDAF from Turitea North, from a full year of operation, is forecast to be $35m on an annual basis.
Mercury has never been in a position where it has 'bought' so many new customers from another retailer in one block before, like the outlined Trustpower transaction. But nor has it proposed to buy such a large quantum of new generation capacity in any one year either. For the purpose of this exercise I will only consider 'capital spent' as relating to projects (and customers) that already exist. So I will remove 'Turitea South' (Turitea Windfarm Stage 2) from my capital spend total.
Available Capital to Spend @EOFY2022
$3,183m - ($1,702m-$208m) = $1,689m
This is enough to buy: $1,689m/$208m = 7 Turitea South windfarms (actual number is 7.7 which is equivalent to 7 with a 10% cost contingency).
SNOOPY