CEN vs MCY FY2021 'Head to Head' (Value)
Quote:
Originally Posted by
Snoopy
FY2020 |
Contact Energy |
Mercury Energy |
No. Shares |
718.1m |
1,400m |
Share Price (17-12-2020) |
$8.06 |
$6.18 |
Normalised eps |
17.6c |
11.7c |
Normalised PE |
45.8 |
52.8 |
Normalised NPAT Margin |
6.1% |
11.8% |
ROE (Assets at Cost) |
8.4% |
9.2% |
Bank Debt |
$1,198m |
$1,291m |
Min. Debt Repayment Time |
9.4 years |
7.9 years |
Snoopy's Fair Share Price Valuation |
$7.42 |
$6.34 |
Current Market Premium or Discount to Fair Value |
+8.6% |
-2.6% |
Notes:
1/ Both CEN valuation and MCY valuation contain adjustment factors to include the value of 'thin air capital' accumulated. For Mercury this is +23.4%. For Contact Energy the adjustment factor is +25.7% It is no longer Contact policy to revalue their assets annually. Hence Contact's balance sheet does not contain 'thin air capital', but Mercury's balance sheet does.
2/ The FY2020 financial statements of both companies were compiled on the assumption that the Tiwai Point Aluminium Smelter is to remain as a going concern.
My snoopshot view shows a clear 'investor value advantage' for Mercury Energy. Despite the stratospheric PE ratios now commanded by both companies, Mercury is trading modestly below fair value. My modelling shows that both companies are now in a position to build substantial new power stations at no additional cost to shareholders. In fact Mercury is doing this right now., and has the ability to build yet another similar sized wind power station when Turitea is finished. In the case of Contact, the new Tauhara Geothermal Station is fully planned (250MW output) and costed ($600m build cost) and consented, with the O.K. from head office all that is keeping construction starting. IMO these renewable energy projects are being priced by the market as already built and operating. Once they come on stream, those stratospheric market PEs for MCY and CEN should reduce.
Mercury Energy currently owns a strategic stake in 'Tilt Renewables', a listed entity that develops and operates wind farms in New Zealand and Australia. 'Tilt Renewables' is currently the subject of undisclosed market interest, that may result in Mercury's interest being sold at a good profit. I have not included any speculation from such a deal in my valuation for Mercury directly. However I have included the capital currently committed to Tilt as 'spent;' on construction of Puketo wind farm (still on the drawing board). So in my judgement ascribing any extra value to the Tilt renewable stake now would be both speculative and also double counting the capital I have already modelled as committed to Puketo.
Important profitability indicators of 'Net Profit margin' and the debt risk indicator of 'MDRT' continue to favour Mercury Energy.
As I write this, both shares are trading above their September 30th 2020 market valuations ( CEN $6.65 and MCY $5.10.) The recovery in share price since that date is primarily because of the political will shown to accommodate an extension to the time frame of the Tiwai Point closure. However, as I write this, the official position remains that the Tiwai Point aluminium smelter will cease production by August 2021. This means there is a substantial downside risk for both share prices if an extension to the Tiwai Point closure date cannot be negotiated,
The current Contact Energy market price premium is not sufficient to make me sell up. I rather like the fact that of late when Mercury has had a good year it has not been so good and Contact and vica versa. Holding both seems to have given me a natural hedge against fluctuating values in the electricity market.
FY2021 |
Contact Energy |
Mercury Energy |
No. Shares |
776.1m |
1,400m |
Share Price (12-08-2022) |
$7.71 |
$6.50 |
Normalised PE |
32.7 |
64.4 |
Normalised NPAT Margin |
8.8% |
8.4% |
Normalised NPAT eps |
23.6c |
10.1c |
Gross dps (FY2022 divs) |
44.3c |
25.3c |
Gross Dividend Yield (FY2022 divs) |
5.75% |
3.89% |
ROE (Assets at Cost) |
10.6% |
6.6% |
Bank Debt |
$856m |
$1,491m |
Min. Debt Repayment Time |
4.68 years |
10.5 years |
Snoopy's Fair Share Price Valuation (3) |
$6.98 |
$5.76 |
Current Market Premium or Discount to Fair Value |
+10.5% |
+12.8% |
Notes:
1/ Both CEN valuation and MCY valuation contain adjustment factors to include the value of 'thin air capital' accumulated. For Mercury this is +23.0%. For Contact Energy the adjustment factor is +22.5% It is no longer Contact policy to revalue their assets annually. Hence Contact's balance sheet does not contain 'thin air capital', but Mercury's balance sheet does.
2/ The FY2021 financial statements of both companies were compiled on the assumption that the Tiwai Point Aluminium Smelter is to remain as a going concern.
3/ The working for 'Snoopy's fair price valuations may be found on this thread in posts 2199, 2201 and 2202 (Contact Energy) and on the Mercury Energy Thread (posts and 1428, 1442 and 1451). The method I used was capitalising the dividend averaged over recent years (in the case of Contact revised according to present dividend policy), and added an 'adjustment factor' representing future forecast dividends from further power generation facilities planned but not yet built.
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My snoopshot view shows a present day 'close value tussle' between 'Contact Energy' and 'Mercury Energy', notwithstanding the stratospheric PE ratios now commanded by both companies. My modelling is based on both companies building substantial new power stations (Tauhara Geothermal for Contact, Turitea Wind for Mercury), with those new incremental power station earnings already priced in to today's share market price for both. Once these developments come on stream, those historic stratospheric market PEs (which are based on historic earnings) for MCY and CEN should reduce.
Mercury Energy has in August 2021, post the FY2021 reporting period, unwound a strategic stake in 'Tilt Renewables', a listed entity that developed and operated wind farms in New Zealand and Australia. 'Tilt Renewables' has been subject to a joint takeover offer from 'Mercury Energy' and Australian based 'Powering Australian Renewables' (PowAR). The result being that Tilt was 'carved up', with Mercury acquiring the NZ based windfarm portfolio (mainly Manawatu based previously owned by Trustpower) and PowAR the Australian based windfarms.
'Net Profit margin' has tightened up between the two protagonists from the previous comparative year. Mercury noted over FY2021 particular 'headwinds that included challenging generation conditions and elevated spot prices' (AR2021 p8). The debt risk indicator of 'MDRT' now favours Contact Energy, which did a significant capital raising during the FY2021 year.
The present day Contact Energy and Mercury market price premiums are not sufficient to make me sell up. There are sufficient growth plans tabled, beyond Turitea and Tauhara, to keep each business growing. The decarbonisation program at Contact as they continue to roll out geothermal developments, and soon windfarms, combined with the winding down of their remaining gas burning assets, should lower the cost base of the power being generated. Mercury is in the middle of a major restructure with the incorporation of new central North Island both organic (Turitea) and acquired (Tilt) wind farm assets. With their strong central North Island hydro-generation presence, this combination should prove an energy supply management game changer.
I will plan to update my comparative taen, market happy so far.ble as both Contact and Mercury produce their full year results over the next month or so. In the meantime I will be 'sitting tight' on both my Contact Energy and Mercury Energy shareholdings.
SNOOPY