That would only explain a drop of 4% though.
Printable View
My guess which isn't worth much is that prior to the bonus share allocation some traders were selling out in expectation that some Mums & Dads would sell down after receiving the bonus shares and that they were right.
I don't know of anything fundamental that has changed. Maybe Elon Musks new battery making solar power more viable. I see in the paper that Vector was getting excited about it.
People will follow a trend and I guess it’s down for now. I’m holding but on no other basis than at IPO at $2.50 a share I was getting a 6-7% gross yield and I don’t think that’s changed.
I'm no expert and have sat back for the last couple of years reading posts and learning from those in the know. It has been very informative so thank you all for that.
Not that its much consolation I kept 2/3rds of my holdings in MRP (sold 1/3 when the price was higher) and looking at buying back in with replacing the ones sold when the trend turns around. I dont understand why they have been sold off as much as they have and to me with the returns and energy use increasing year on year and whats shaping up to be a cold winter its a reasonably solid performer worth keeping tucked away.
Retail investors still selling out?
Don't know why the share price is continuing to decrease, is it really that bad that winter is here? I thought this would have helped, not caused another 10% of market cap to get wiped out...
Hopefully reserve bank will cut interest rates tomorrow... that would surely give a welcome boost
I was planning to buy back in when the sell off settles and each day find myself wondering how much lower it could go....
I think the entire electricity sector is on a downward path until the Tiwai decision is known.
Agree.Opportunity to top up on the uncertainty if one believes in a positive Tiwai future.
Surely with an interest rate cut (and signs of more to come apparently) people will pour back into the electricity sector and stop the 'senseless selloff'
My view has been that the gentailers were overvalued and I have been generally criticized for expressing it. I now think the gentailers are back to something like fair value, I won't be interested unless they fall further and become cheap.
I can't see it happening but the future is unpredictable and to the extent it is known, included in share prices by professional analysts. Maybe I will be "lucky" again.
I was standing in the stock exchange, years ago, in Christchurch. You could pop over in the lunch time. The attractive girl wrote prices on the white board for all the stocks. Chap turns to me and says, 'it cant fall any lower, can it?' I mumbled hope not. But knew it must. Market Forces you know. Amusing if you know the drill. DONT PANIC!
With a great (or what I think is great) monthly operating report out from Meridian about lake levels, intakes etc, hopefully MRP will be reporting the same... also mentioned that electricity demand is higher than last year.
I thought winter would have helped, and it looks like it has helped Meridian, hoping the same for MRP...
No useful information in this post, just don't have anyone else to talk to re dividend yields.
Well 2015 was good, just doing my tax return and I calculate a 10.5% gross yield on initial investment cost of $2.50. Admittedly special dividends won't be coming annually but yippee, something making me money at long last.
Makes you wonder if NZers are paying too much for their power.
Look at me an investor with a conscience or should I say thank you John Key for you neo-liberal ideas and diverting this income stream from the people of NZ to private investors. I'll make sure it trickles down after I have saved enough to be financially comfortable(could be a long way off). Good idea bumping up GST to reduce income taxes. As long as I keep reinvesting/saving I won't be paying any GST. Another fine example of the general population getting screwed over for the benefit of the more well off. Well done NZ it seems the last election showed how selfish and stupid the (disappearing) middle class can be. We get what we vote for.
Sorry last paragraph was added in as I am still angry with the result of the last election.
I thought the middle class was growing, not shrinking.
On neo-liberal as an epithet - "Neoliberalism" has become a jargon word. It communicates very little other than to signify that the speaker holds a certain political view and might not be very fun to talk to."
http://www.stuff.co.nz/manawatu-stan...ong-for-labour
Hey man, be careful you nearly broke my computer. My screen and keyboard almost become waterlogged with your tears :D
Anyway, you may find solace in the fact that at a fundamental level the Government still retains through tax a 28% share of all profits made by MRP. 100% of 51% plus 28% of 49% plus freeing up capital and not needing to borrow to pay for things... I wish I could keep 28% of the profits of anything I sold :D
I went for a night time drive down a new large subdivision. The street lighting was LED..impressive.
It seems only a matter of time when replacements will be with LED's.
Googled it and it seems LED lights use 40%-80% less power than Sodium lamps...
Hmmm..... there's an awful lot of roadside lighting in NZ
All great for new builds, however driving along the highways in the north island it seems we can barely keep up with basic maintenance, let alone a complete refit in the near future. Not sure if roadside lighting consumes a large amount of power relative to other usages like industrial or household.
In saying that, sooner or later if the cost differential is large enough (and the relevant barriers to change aren't too high) it will happen.
I found a paper (PDF File) that shows all street lighting in NZ amounts to less than 1% of various distribution companies revenues (page 21/25)..... and most accounts a high % of the bill is fixed so I now understand the slow uptake to LED street lighting...and what you say Antipodean about refits.
The paper also shows some insight into the NZ Power Market structure and how future technology may inpact on this structure, especially when it comes to methods of billing major customers...interesting reading to fill in ones time
You know, if the sky doesn't fall there is some pretty good yield on MRP and other power companies :D
http://www.nzherald.co.nz/business/n...ectid=11470604
Exactly, and hasn't the market moved to price in this uncertainty already. Some think the market is about to go to hell in a hand basket. Reminds me of the markets reaction to Labour electricity policy. Nibbling still (on one of them)
I am freezing down here in Christchurch. Heaters running flat out. A small fin heater tucked under the desk between my legs. Winter is sure good for increasing electricity demand. With most of the NZ electricity being supplied by renewable generation. Generators look after the maintenance of the generators too.
A major point to remember is that high efficiency normally comes at a higher maintenance cost. Heat Pumps are a good example of this. They need maintenance.
Log Burners need Logs. Which need to be found. And sawn. And stored.
My beef is how I am being charged, in Christchurch, 18 cents a unit for the wire from Twizel to Christchurch. It would almost be cheaper to drive up there and fill the car up with the stuff, batteries you know, and drive back. It cannot cost that much for the wire from Twizel.
Can sympathies with that in CHC 9Kw heat pump running 16Kw keeping the spa warm.....6Kw underfloor heating element overnight....I'm sure my MRP divi's are not quite keeping up with my usage!! somehow think solar wouldn't cut it either.......for now I think the electricity demand will rule
Bloody freezing this morning - must be good for business though :)
So the general consensus on here is that Tiwai won't close otherwise why the extension? I see this stock heading back to $3 once this is confirmed. I'm thinking of doing a serious averaging down as my current average is $3.24, risky if Tiwai closed but upside more likely plus a good divvie coming up:cool:
I am very confident in MRP long term, I am looking forward to August 3 when they announce they are not closing and send all the gentailers on a steady upwards march, with this in mind, no reason why this shouldn't be a $3.50+ share by the year's end. (all this rain must be good for generation! all this cold must be increasing power usage! - wonder when market will catch on to this?)
I'm not as supremely confident as you Crackity, but it seems less likely than more likely at the moment, albeit keeping the whole energy sector on tenterhooks.
It's interesting to me though that MRP has sold off virtually the entire 'election premium' which began around the IPO price (after being sold down about 20% from IPO!) and has found renewed buyer support back around the IPO price! What a rollercoaster ride for a boring utility eh?
Indicators have ticked upwards and the price has ranged this week right in between my fav 10/14 weekly EMA's. MRP has been just a bit too volatile for me so I sold my IPO holding recently to at least book a modest capital gain + dividends = 17.4% (still holding MEL though).
A move through my EMA's and a solid close above $2.93 resistance with a rising trend would have me back in, but closely watching. My concern is that MRP along with the other power company's, post a Tiwai decision, and pending the next election, is that they will find a fair value range .. and for MRP that could well be in the $2.61-$2.93 band. We need to keep in mind these gentailers aren't growth companies (imho).
Which would mean, goodbye capital gains and hello boredom, which could only be offset by consistent profits and returns to shareholders. Careful what we wish for.
Attachment 7481
dear long road home...with all due respect ..it will be...me..all of us have made mistakes...but honestly how can you ave at 3.24...did you look at the 2 year chart...were you there at 1.80....again go well mate...your posts are quite depressing.....cheers mate
Troyvdh MRP traded for quite a while in the $3.00-$3.56 range so what is so unusual at holding at a $3.24 average? My above post is just an honest expression of what I'm planning on doing in the coming week and seeing what others thoughts are re MRP at the moment, if you find my posts depressing perhaps that's more a reflection of your own state of mind? Cheers. PS-The day I have to be a pretender or game player to please others on here will be the day I leave this forum.
I believe that periods of volatility in all the generator shares will be the norm while Rio Tinto are involved. Their brinkmanship/bully-boy negotiating style keeps certainty a short-range luxury. Their electricity contract periods seem very short duration. All generator stocks are effected because power that is no longer sold to Tiwai Pt can be sold elsewhere, but some generator(s) will miss out due to current over-capacity. The HVDC link constraint exposes MEL to this more than others.
I do not expect the smelter to close, in fact I believe the main part of the deal has already been agreed back when manapouri transformers were purchased 12 months ago.
But I don't think MRP will become the boring utility stock until new smelter owners are found and they agree to some longer duration electricity supply contracts (whoever they are with)
Personally I prefer GNE over MRP
As I like to say: "GNE or MRP?" ... "Why not both?" (... Followed by numerous cheers)
What sort of BS post is that? What's the point of it....highlighting another investors supposed mistakes. You may well think about taking your own advice to "go well", however when you get to where ever you are going perhaps you could consider just keep going, preferably in the other direction than us, and refrain from making disparaging comments about other investors. And what's this about signing off with "cheers mate". PS if this gets me banned so be it but what a nasty little post that was.:mad ;: Where is your sense of common good manners?
I am not sure if this is good, bad, or just ok... Looks just ok for me, but unsure how the share price will react...
Thoughts?
https://www.nzx.com/companies/MRP/announcements/267129
1/ Significant Business Scale (Top 3 in chosen market)
Mighty River Power is one of the 'big five' gentailers in the New Zealand Electricity market. They are currently (31st December 2014 figures) number three in terms of customers with 19% market share (behind Genesis with 26% and Contact with 22%). They are also number three in terms of GWh of power sold with 18% market share (behind Meridian on 33% and Contact on 23%).
Following the decommissioning of the Southdown gas power station on 31-12-2015, MRP will have a strong line up of 5 geothermal power stations in the central North Island and 8 hydro stations on the Waikato River in the northern-cental North Island. The geothermal stations will run as base load, while the hydro stations, which used to be exclusively base load too, will assume the role of 'topping up the power' as Southdown once did. Consumate with this wholesale capacity, MRP, under the Mercury Energy brand, runs the largest power retail business in Auckland. MRP has a significant South Island custmer base too in Christchurch and Dunedin. These customers receive their power from a virtual asset swap deal that involves Meridian Energy doing their South Island generating.
Conclusion: Pass Test
SNOOPY
Mighty River Power currently has 1,400,012,517 shares on issue. Just prior to listing there were only 377,560,546 shares on issue, held by sole shareholder the NZ government.. The government decreed that more shares be issued just prior to listing to bring the total share count up to 1.4billion. For ease of comparison I have adjusted the eps figures before listing as though the 1.4b of shares currently on issue had been on issue throughout the entire comparison period. The financial year for MRP ends on 30th June.
'Earnings' used are normalised operational earnings, excluding one off gains/losses and asset revaluations.
FY2010: $115.3m/ 1,400m = 8.2cps
FY2011: $161.6m/ 1,400m = 11.5cps
FY2012: $148.1m/ 1,400m = 10.8cps
FY2013: $167.9m/ 1,400m = 12.0cps
FY2014: $186.5m/ 1,400m = 13.3cps
Conclusion: Pass Test
ROE = Net profit / EOFY Shareholder Equity
FY2010: $115.3m/ $2,689.0m = 4.3%
FY2011: $161.6m/ $2,906.5m = 5.6%
FY2012: $148.1m/ $3,104.2m = 4.9%
FY2013: $167.9m/ $3,181.7m = 5.3%
FY2014: $186.5m/ $3,219m = 5.8%
Conclusion: Fail Test
Margin = Normalised Net profit / Normalised Revenue
Note: all revenue figures are exclusive of line charges
FY2010: $115.3m/ $1,104.6m = 10.4%
FY2011: $161.6m/ $1,163.9m = 13.9%
FY2012: $148.1m/ $1,520.6m = 9.7%
FY2013: $167.9m/ $1,382.4m = 12.1%
FY2014: $186.5m/ ($1,705m -$431m)= 14.6%
While not increasing year on year every year, it is clear the ability to raise margin is there
Conclusion: Pass Test
This share should be valued over the long term on its ability to pay dividends only. The low ROE figure is not sufficient to be sure of growth given a ten year timeframe. The Warren Buffett style growth model won't fit as a result. Yet actually, there is something wrong with this analysis as I have presented it. It deserves a closer look. But that will have to wait until tomorrow!
SNOOPY
So in other words, MRP is a buy?
I have been trying to find some information of the following, come someone point me in the right direction please.
Over the past 5 years I have read that demand for power has decreased 0.2%pa in NZ so I would assume prices would have to go up to get in increasing revenue. Where could I get the info on demand (units used) and price (per unit) for the past few years? Not just for MRP, but in NZ.
Try here, http://www.emi.ea.govt.nz
Thanks Baa Baa, exactly what I was looking for
I admire your desire to 'cut to the chase' TJ. But for a fundamentals investor such as myself, that isn't how it works. My procedure is:
1/ Design a financial model so that I can value MRP on my own assumptions.
2/ Check the market price to see what sort of discount I can get on my perceived 'value', and consequently whether I feel MRP is a buy or not.
So far I am only doing step 1. I bought MRP at float time. But whether I would buy more today is another question. At the moment, I don't know the answer.
SNOOPY
PS I might add a third step too. Even if I do decide MRP is a buy, I ask the question:
"Is it more of a buy than another comparative option such as CEN?"
Thanks for the post Snoopy. A great contributor. I haven't followed your ARI thread as I immediately thought you were insane to go against the commodity price trend even the companies supplying the miners would suffer I would have thought.
P.S. I hope it goes well for you.
A great question fish. I was being a bit naughty suggesting that the entire Waikato river has now been reduced to a 'top up' system supporting the 'main' source of power generation - geothermal. MRP still generates more power in total from hydro, even in the driest catchment years. However, it is true that hydro is a very effective peaker as well.
The best way I know to answer it is to present you with a table of 'Electricity sales to Customers' vs 'Electricity Generated'. I could make up some desperate theoretical scenario. But real life can be almost as desperate. So I will take FY2013 as representative of the highest demand I can find ('FY2013 Electricity Sales').
To make it just that bit harder for MRP for hydro generation purposes, I will take the year that departed CEO Doug Heffernan described thus:
"inflows to the Waikato hydro river system being the lowest in the Company's history" (FY2014, p9 ARvw2014).
Geothermal energy is regarded as a highly stable source of renewable energy. I shall use FY2014 again because this was the first year over which all of Genesis's geothermal power plants were up and operating.
To be extra nasty, rather than look just on an 'annual basis', I will present the quarterly figures, to see if I can expose any seasonal weakness in the power supply/demand profile.
So how does MRPs 'demand' vs 'generation' equation stack up?
Q4 30th June Q3 31st March Q2 31st December Q1 30th September FY2013 Electricity Sales (GWh) 1316 1159 1272 1505 less FY2014 Geothermal Generation (GWh) 670 682 630 691 less FY2014 Hydro Generation (GWh) 815 834 985 863 Generation Power Surplus (GWh) 169 357 343 49
That result should give you some reassurance Fish. Sure, in the depth of winter September quarter, the power surplus from renewables is getting thin. But it is still there, even in the combination worst year conditions the weather has thrown at MRP so far!
SNOOPY
A follow up comment on power generation in the 21st century.
The above table I have produced is representative of the 20th century 'bricks and mortar' generation system. These days we have 'virtual power plants'. With a 'virtual power plant', rival generators can have under contract access to a rival's power station in a different island in times of unusual river flows (for example). Next there is the NZ power 'hedge market' operated out of the ASX I believe. Then of course there is the 'regular market' where gentailers can buy power off each other by signing up to the lowest quoted marginal cost net supplier of power. The whole thing has got very complex. Nevertheless I think there is still real value in looking at the 'hard asset' to 'customer sales' power balance. If nothing else it provides a 'base case' of what is happening, and is the ultimate measure of reversion should all of these fancy 'on paper' power trading systems be suspended.
SNOOPY
There is an alternative calculation using different data to work out the return on shareholders equity of MRP. If you look right at the end of note 10 in AR2014 you will see the carrying value of assets had they been recognised at cost. Just above that you will see the note referring to the increase in value of generation assets of $40m, in addition to the $80m booked in FY2013. With MRP there have been many prior year asset revaluations like this.
Go to the income statement (p6) and you will see that the total comprehensive income for the year of $258m includes revaluation of generation assets of $35m +$5m =$40m. None of this is included in the net profit of $212m (p5). Now go to the Statement of Changes in Equity (p8) and you will that there are entries for fair valuation of hydro and thermal assets ($4m) and other generation assets ($25m) net of taxation. The tax paid on these asset revaluations was therefore:
($40m - ($25m+$4m))/ $40m = 28%
This is the normal company income tax rate. This implies the company has chosen to revalue their generation assets and pay tax on that revaluation and therefore generate extra income tax imputation credits that will be available for shareholders. That policy strikes me as strange. I would have thought revaluation of capital assets like power stations was a non taxable item! Can any accountants out there explain why MRP have treated their asset revaluations in this way?
Whatever the explanation, it looks to me as though these asset revaluations are being treated as though they will be a perpetually occurring benefit over and above the net profit for every year. The asset valuations, as I see it, are effectively new capital that goes onto the balance sheet out of thin air! This is a good thing for shareholders. But it artificially decreases the ROE figures if you calculate these at declared asset value. That's because the capital that arose out of thin air was never contributed by shareholders!
If we redo the ROE calculations, removing the 'thin air' capital I have described above, then the ROE results are very different.
FY2010: $115.3m/ ($2,689.0m - $2342.0m)= 33.2%
FY2011: $161.6m/ ($2,906.5m -$2,710.2m)= 82.3%
FY2012: $148.1m/ ($3,104.2m -$2,239.2m)= 84.6%
FY2013: $167.9m/ ($3,181.7m -$2,831.4) = 47.9%
FY2014: $186.5m/ ($3,219m -$2,844m) = 49.7%
Conclusion: Pass Test, with flying colours!
SNOOPY
They say you can't get something out of nothing. But with the NZ electricity market, I am not sure that holds. Here is how the 'something out of nothing' method works:
1/ Revalue assets to market.
2/ Note that after revaluation your return on assets in not acceptable.
3/ Put up prices to get an acceptable return on assets.
4/ Price increases now increase underlying value of assets
5/ Go back to step 1
The power companies are very keen on using EBITDAF as a measure of their operating performance. But MRP has another profit stream, generated according to steps 1 to 5 above, not included in EDITDAF. These revaluations are based on future earnings projections. That means they might go down, although in practice I have never seen this. The figures I present below are from FY2009 onwards. This is the first year after the GFC hit, and power usage growth changed from its historical pattern.
All base figures are taken from the 'Statement of Change in Equity' Group figure for the appropriate year.
Revaluation Hydro & Thermal Assets ($m) Revaluation Other Generation Assets ($m) Total Revaluation ($m) Pre Tax Revaluation ($m) Pre Tax New Capital Per Share (c) 2009 0 170.987 170.987 244 17.4 2010 200.900 60.250 261.150 373 26.6 2011 153.300 135.275 288.575 412 29.4 2012 119.520 2.880 122.240 170 12.1 2013 30.960 26 57 79 5.6 2014 4 25 29 40 2.9 Total 929 94.0
Note:
1/ eps 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.
That first total figure represents the new 'thin air' capital that has appeared on the MRP balance sheet from 2009 to 2014 inclusive. $929m is a lot of money, perhaps even enough to fund a new power station, without going back to shareholders for more capital? It would certainly go a way towards that!
The last total figure represents the equivalent extra eps in a gross dividend form. This is the amount of extra gross dividend that could have been paid to shareholders, should the MRP board have decided not to reinvest their 'thin air' capital. I do note the amount of 'thin air' capital has been decreasing, year on year. But perhaps this is not a problem, given MRP have declared they are not planning on building any more new power stations in the forseeable future? Furthermore when the need for more electricity generation does become apparent, value will once again arise out of thin air based on increasing energy use projections. So MRP may never need to raise capital again to build new power stations!
SNOOPY
No smilie with your post. So just in case you were serious, at the end of the PP&E notes section of the Annual Report, the following sentence appears:
"All hydro thermal and other generation assets shown at valuation were revalued using a net present value valuation methodology by Pricewaterhouse Coopers, an independent valuer."
I note as an observation that Contact Energy, a similar gentailer which operates hydro and geothermal assets, does not do this!
SNOOPY
The following table illustrates the actual cashflow in and out of the balance sheet over the years.
NPAT as declared (cps) Dividend (cps) Pre Tax New Capital Per Share (c) 2009 11.3 3.96 17.4 2010 6.1 20.43 26.6 2011 9.1 6.79 29.4 2012 4.9 8.60 12.1 2013 8.2 8.01 5.6 2014 15.1 12.40 2.9 Total 54.7 55.6 94.0
You can see that net profits are almost exactly cancelled out by dividends over the years. This means that the only source of strengthening the balance sheet has had since the beginning of FY2009 is the previously described 'thin air equity'.
During this time two new geothermal have been constructed. These were
1/ Nga Awa Purua, commissioned in FY2010. Total cost $430m or 30.7cps
2/ Ngatamariki, commissioned in FY2014. Total cost $475m or 33.9cps
Total cost: 30.7 + 33.9 = 64.6c = 65c (figure A)
The after tax value of the asset revaluations from FY2009 to FY2014 inclusive were:
= 0.7*(17.4+26.6+29.4) + 0.72*(12.1+5.6+2.9) = 66.2c
Now take away the 0.9c 'dividend deficit': 66.2c - 0.9c = 65.3c = 65c (figure B)
To the nearest cent, 'Figure A' matches 'Figure B'. So this shows that both of Mighty River Power's brand new geothermal stations built since 2009 have been created out of nothing else but 'thin air capital', without a cent having been stumped up by shareholders! Amazing stuff.
SNOOPY
My 'proof' as presented above actually still has a big hole in it. There is another way to create two new power stations without stumping up new equity. That way is to borrow the money! I think it is worthwhile looking at the balance sheet at the end of FY2008 verses how it was at the end of FY2014 to see if the borrowing did go up over that time.
EOFY2008 EOFY2014 Total Assets ($m) 4,058 (100%) 5,689 (100%) Total Liabilities ($m) 1,800 (44.4%) 2,470 (43.4%) Net Assets ($m) 2,258 (55.6%) 2,470 (56.5%)
This table shows that the total liabilities have increased over the comparative period. However, the assets have increased too. As a proportion to assets, the company was slightly less indebted at the end of FY2014 compared to FY2008. This in turn means the company did not expand by becoming more indebted out of proportion to its growth. Finally, that means that my explanation of MRP as a company expanding using 'thin air' capital is still valid.
SNOOPY
Is it just me or do these look pretty bad?
Not that good, NPAT:(
Looks OK to me once the exceptional costs are removed
Keep in mind that water inflow into Waikato catchment was comparatively low and Southdown was being run much harder at higher cost
Good yield also, with another special divvy announced...makes it 8.4c+2.5c = 10.9c for this period.
Yes special dividend was a bit of a (good) surprise, everything else average at best... but I still think long term MRP is best positioned power company (with the exception of maybe MEL)
The FY2015 results came out on Friday. So time to do the annual statistical overview update.
For ease of comparison I have adjusted the eps figures before listing as though the 1.4b of shares currently on issue had been on issue throughout the entire comparison period. The financial year for MRP ends on 30th June.
'Earnings' used are normalised operational earnings, excluding one off gains/losses and asset revaluations.
FY2011: $161.6m/ 1,400m = 11.5cps
FY2012: $148.1m/ 1,400m = 10.8cps
FY2013: $167.9m/ 1,400m = 12.0cps
FY2014: $186.5m/ 1,400m = 13.3cps
FY2015: $155.5m/ 1,400m = 11.1cps
Conclusion: Fail Test
SNOOPY
Margin = Normalised Net profit / Normalised Revenue
Note: all revenue figures are exclusive of line charges
FY2011: $161.6m/ $1,163.9m = 13.9%
FY2012: $148.1m/ $1,520.6m = 9.7%
FY2013: $167.9m/ $1,382.4m = 12.1%
FY2014: $186.5m/ ($1,705m -$431m)= 14.6%
FY2015: $155.5m/ ($1,678m -$422m)= 12.4%
Conclusion: Fail Test
SNOOPY
Thanks to the 'Thin air' asset value correction applying to the FY2014 result, the FY2014 data does support a Warren Bufffet style growth projection calculation. However, what a difference a year makes.
The increasing earnings trend is no longer discernable. Neither is there any pattern showing an ability to increase margins accross the years. The culprit? FY2015 was the worst on record for water inflows into the Taupo hydro scheme. But just a few years before that there were two more 'worst year since the company was formed' events: The Waikato river system drought of FY2008, and the second driest autumn in 80 years in FY2010. When the abnormal becomes the new norm, this is where many company valuation techniques break down.
SNOOPY
One thing that caught my eye was the increase in the carrying value of assets profit of $504m before tax. In a time of relatively flat demand, this struck me as an extraordinary amount to once again pull out of thin air. It's MRP's biggest asset revaluation profit in eight years.
If you believe the Property plant and equipment sensitivity notes, +$504m is equivalent to revaluing all industry profits up by over 6%. Given that this was a 30th June figure, made before the subsequently announced closure of two large thermal stations (Contact's Otahuhu B and Genesis Energy's Rankine units at Huntly), we MRP shareholders could be in line for another large revaluation bonus next year. That's because the baseload renewable power stations that do remain become consummately more valuable!
SNOOPY
What is the call then Snoopy buy, hold or sell?
Is your concern is an ability to grow earnings above the rate of inflation. Wouldn't the only restraint be rules provided by govt. these should surely include an allowance for inflation. Or are they restrained by competition. I only ask because my own understanding of the company is limited but I like a good yield.
Current dividend (incl special) of 15.139cents (incl imp crs) and assuming they match last March's dividend of 7.778cents I calculate a before tax yield of 9.2% based on a purchase price of $2.50.
I guess I need you to tell me if this is sustainable.
The ability to grow margins above the rate of inflation is one way to measure a company's ability to recover from a bad patch in the market. If they don't have the ability to do this, then there is every chance that competition will result in a race to the bottom. Competitors chop prices to gain market share, others do the same and before long the margin for the whole electricity generating industry is cut to the bone. If you are a consumer you might say "Great". But ultimately these companies have to generate enough profit to allow reinvestment in power generation plants to take place.
Opportunities exist in electricty generation markets beyond just price competition. Shifting the time of day that power is required will allow more profit to be generated from the same infrastructure. Ultimately good for the consumers and good for the gentailers if they play their cards right.
AFAIK, there is no government restraint on the gentailers. It is only the lines companies, the local monopoly, that have government mandated acceptable rates of return. The fact that most companies are not able to increase their margin (by cutting costs or increasing prices) all the time is the reality of a competitive market.
SNOOPY
In general a 'special dividend' is not sustainable. If it were, it would be part of the regular dividend. The last five years is IMO the best yardstick we have of what the potential for regular income might be. This includes good and bad years and is, in my view, a better way of looking at things than trying to guess what weather conditions will be like "next year". The eps record is as follows:
Year eps (normalised) 2011 11.5c 2012 10.8c 2013 12.0c 2014 13.3c 2015 11.1c
I get an average of 11.74cps. Buying on a 6% gross yield that I regard as 'about right' given current interest settings and a low to no growth demand environment gives an implied share price of:
11.74/ (0.06 x 0.72) = $2.72
I note the current trading price is $2.77. So even if the current dividend yield is sustainable, I don't believe the share price is cum an 8.4c final dividend combined with 2.5c special (ex dividend price is an implied $2.66).
SNOOPY
The 'closer look' revealed that the ROE was actually spectacular. So that meant the Warren Buffett style growth model could be applied after all. Until the 2015 result came out and destroyed any recognisable eps and margin trends! This doesn't mean that MRP is not a good investment though. It just means I have to use a different valuation model to find out.
The valuation model I like to use in these circumstances is the average dividend over the business cycle method. In the case of MRP I am restricted to five years of data. Going back any further is IMO not useful because much of the geothermal power generation that makes MRP the company it is today was not in place before FY2011 (FY2010 was when the 140MW Nga Awa Purua station came on stream).
Nevertheless 'average value of dividends' does not allow for the company's ability to generate 'thin air capital'. If a company was never going to grow then this 'thin air capital' could be regarded as a bonus dividend stream. MRP has been able to commission two brand new significant geothermal power stations out of thin air capital since FY2010. And they have consent to build more (on the Taheke Geothermal Field, NE of Rotorua with local iwi co-ownership). Shareholders have the ability to fund MRP's growth without injecting any new cash capital into the company. I think that fact of the company has 'extra value' that is not reflected in the normalised 'earnings per share' figures.
SNOOPY
Slide 14 in the annual results presentation on "Tightening Supply with Thermal Rationalisation" is worthy of comment. It shows the 'Winter Energy Margin' (based on energy consumed) adjusted for thermal closures is expected to disappear by 2025. The margin will reduce below the 'System Operator Security Standard' as soon as 2019. So the construction of at least one major new power station may occur sooner than most people think. I think MRP are well positioned to build that new geothermal plant. And that bodes well for MRPs potential 'market share' in the medium term.
SNOOPY
Two years in a row for special dividends hopefully it is becoming the norm.
Using a capitalisation rate of 6% for Gentailers, what is your current cap rate for property trusts. (although I read somewhere you don't invest in them as your house is considered your property in your portfolio)
How do you establish a cap rate and does it just move up in line with interest rate rises so in theory if interest rates rise you write down the value of your investments. 6% is OK from savings but if I am borrowing to invest with a 7% interest rate my cap rate should be at least 10% I suppose. All guess work... I guess.
By booking tax credits from an associated $500m asset revaluation, they certainly have the capacity to pay more special dividends in FY2016, whether or not they choose to do so.
It would depend on the property company. With AIA, I might still go for 6%. Something like Kiwi Income Property, with a lot of mall exposure. Maybe 7.5%. Something that was more office towers, maybe 9%. But as you noted, I don't own any listed property investments.Quote:
Using a capitalisation rate of 6% for Gentailers, what is your current cap rate for property trusts. (although I read somewhere you don't invest in them as your house is considered your property in your portfolio)
All else remaining equal, yes a rise in interest rates would cause my fair value of my high yield income producing assets to head south. But for an income investment I have a lot of confidence in, I would still be looking for a gross yield around 2 percentage points more than if I had put that same money in the bank.Quote:
How do you establish a cap rate and does it just move up in line with interest rate rises so in theory if interest rates rise you write down the value of your investments.
You are playing quite a dangerous game borrowing to invest in these high yielding shares I think. The reason is that the directors already have a fiducary duty to shareholders to pay out excess capital. So by borrowing you are in effect saying that you know better than the directors and they should be paying out more to you. It's a big call to make.Quote:
6% is OK from savings but if I am borrowing to invest with a 7% interest rate my cap rate should be at least 10% I suppose. All guess work... I guess.
SNOOPY
A couple of interesting statistics from FY2012, a year without an unusual river inflow. Mighty River Power had a 51.4% capacity utilisation from their hydro stations and a very impressive 94% capacity utilisation from their geothermal stations. This gives an idea of the relative importance of the two kinds of generation in relation to total energy generated by MRP. Since the commissioning of the latest geothermal station (Ngatamariki) in 2013/2014, MRP have enough revalued capital on the books to build yet another 'free' geothermal power station if they so choose. Let's say this potential new station could deliver 100MW. By how much would that increase the base generating capacity of MRPs portfolio?
1044MW Hydro (existing) x 0.514 = 537MW (effective)
463MW Geothermal (existing) x 0.940 = 435MW (effective)
100MW Geothermal (new) x 0.940 = 94MW (effective)
Hence the effective new capacity increase is:
94 / (537+435) = 10%
OK that new power station is not yet built, or even hinted that it will be started. But I would argue that MRP already has this new hidden value built into the company. The company is effectively 10% bigger than its current production capacity, and could up size by 10% seemlessly if management so chose to do it.
So I take my previous valuation based on eps flow alone:
11.74/ (0.06 x 0.72) = $2.72
and up it by 10% to take account of the power station on the books that could be built now:
$2.72 x 1.1 = $2.99
By my reckoning $2.99 is my best 'investment estimate' of where the value of MRP sits right now.
SNOOPY
Thanks for the reply Snoopy.
In regard to your question on asset revaluations post #663 (this may have already been answered) I would suggest the following but wouldn't put money on it.
I assume MRP claims depreciation on their dams and geothermal assets for tax purposes but they need to record a "fair value" for their assets for the presentation of the financial statements. Fair value is established using NPV and the assets are revalued up especially when interest rates are so low as interest rates form part of the capitalisation rate (low cap rate high asset value). There is no tax paid or imputation credits created by the revaluation but they recognise that if the assets were sold it would create an equivalent amount of income in the form of depreciation recovered so the revaluation is shown in equity after tax. That is my best guess but anyone can feel free to point out any errors in my theory.
Capital out of "thin air" watch it disappear again if interest rates start to rise and the capitalisation rate increases. You would have seen this with AIA with the return of capital. To me it looks like AIA borrowed real money to pay shareholders the asset revaluation increase(capital return). Also you see it all the time with property company revaluations. Interest rates fall, cap rates fall and assets increase in value. If interest rates rise it all heads the other way.
You shouldn’t see an allowance for tax (depreciation recovered) on property valuations anymore as they can no longer claim depreciation on buildings for tax purposes.
Large companies like these will have a tax fixed asset schedule and the one we see in the financial statements. Any tax deferred should be shown in the financial statements. In the case of MRP the tax deferral is indefinite as the assets are never likely to be sold.
The roughly $83mill tax paid on profits would be more than enough imputation credits for the dividends paid.
Property and asset revaluations would not incur any income tax. They are accounting journals based on subjective valuations that is one of the reasons we have a cashflow report.
MorningStar's latest recommendation report (31/8/15) has MRP as a hold.....
".....Our fair value estimate is unchanged at NZD 2.90 (AUD 2.70) per share. Mighty River Power is trading broadly in line with our fair value estimate. We maintain our narrow economic moat and high fair value uncertainty ratings. Mighty River Power is one of the four large electricity generator and retailers efficiently servicing the oligopolistic New Zealand Market. The company boasts the lowest cost structure in the industry, which is on track to decline even further as it moves to a fully renewable model...."
Thanks for this update 'from the pros' Blackcross. I am pleased that my own valuation of $2.99 is within the ballpark. All these NZX top ten companies are analysed to death. So it would be a real surprise if there were big disagreements. Nevertheless different analysts looking at a company can have different perspectives. It would be interesting to know more about how Morningstar set up their assumptions as well as their final $2.90 result.
My '6% gross yield' benchmark is lower than most analysts would use (resulting in a higher MRP valuation). But generally I assume less growth than other analysts, which is a balancing factor. I am a little surprised that Morningstar think that MRP has the lowest cost structure though. I thought Meridian's cost structure would be lower.
I tend to look longer term than most analysts, because I hold shares right through the business cycles. I never try to guess exactly where the power market will be in a years time, for instance. I prefer to remain safe in the knowledge that weather does not always go to a plan. I also heavily favour actual recent result scenarios, rather than dreaming up what I think might happen. In stable markets, I find history tends to repeat!
'Stable markets'! Well nothing is ever truly stable. Some of you may have noticed an inconsistency in my valuation.
1/ I am assuming a stable power market going forwards.
2/ I am building in an allowance for an increase in 'thin air capital'. 'Thin air capital' can only arise long term because the valuation of generation assets goes up because the overall market is growing!
In truth I do believe the electricity market will continue to grow in the medium term (except if Tiwai closes). But I think it will grow less than in the pre-GFC days. Probably about 1% per annum on average, down from 2% per annum pre-GFC. I could fiddle around adding a 1% growth factor to my 'stable' energy revenue projections. But I don't believe it would change my valuation result much, and it is easier not to do it. So in keeping with my new investment analysis philosophy (keep everything as simple as you can to be effective, but no simpler) I chose not to do it. Not doing it will introduce an extra small element of conservatisim in my investments valuation. And I think that is a good thing.
SNOOPY
It hasn't!
I agree with all you have written above. If you go to page 14 of AR2014 you will see that an increase in discount rate of just 0.5% will reduce the value of the power stations by $489m! That is very significant when on the same page it would take a 'future wholesale electricity price path' (I think that means the result of a discounted cash flow calculation reflecting future prospects), shows that prices would have to fall some 7% to have a similar effect.Quote:
I would suggest the following but wouldn't put money on it.
I assume MRP claims depreciation on their dams and geothermal assets for tax purposes but they need to record a "fair value" for their assets for the presentation of the financial statements. Fair value is established using NPV and the assets are revalued up especially when interest rates are so low as interest rates form part of the capitalisation rate (low cap rate high asset value).
Sounds plausable. This helps solve a problem with my own suggestion of just taking the asset revaluation straight to the bottom line, and so incurring an immediate tax bill. Say the assets needed to increase by $500m to reflect the NPV of the discounted cashflow. The company does this but in so doing so creates a tax bill of $500m x 0.28 = $140m. This in turn means the net assets gained as a result of the revaluation is only $500m-$140m = $360m. So the revaluation falls short and we have to do another revaluation of $140m, which also incurs tax. And that leaves the valuation short again, so we carry on in a kind of endless revaluation loop!Quote:
There is no tax paid or imputation credits created by the revaluation but they recognise that if the assets were sold it would create an equivalent amount of income in the form of depreciation recovered so the revaluation is shown in equity after tax. That is my best guess but anyone can feel free to point out any errors in my theory.
Property and asset revaluations would not incur any income tax. They are accounting journals based on subjective valuations that is one of the reasons we have a cashflow report.
In FY2014 normalised earnings of 11.1cps were rather less than the 16.9cps declared in dividends. Obviously that situation is possible because of accumulated tax credits from previous years.Quote:
You shouldn’t see an allowance for tax (depreciation recovered) on property valuations anymore as they can no longer claim depreciation on buildings for tax purposes.
Large companies like these will have a tax fixed asset schedule and the one we see in the financial statements. Any tax deferred should be shown in the financial statements. In the case of MRP the tax deferral is indefinite as the assets are never likely to be sold.
The roughly $83mill tax paid on profits would be more than enough imputation credits for the dividends paid.
SNOOPY
This is from Note 6 2014 accounts. "Imputation credits available to shareholders in the future amount to $45.8 million (2013: $32.5 million)." Accumulated $13.3mil additional Imp Crs in 2014. Paid more in tax than attached to dividends. I guess you could compare dividends to earnings to estimate it all but I haven't tried.
Thanks Aaron. I have decided to follow up on your hint to look at what has happened to MRPs imputation credits over the years. By the end of FY2012 (SOFY2013) just before the public partial float management virtually cleared out their imputation credits($2.9m left) by issuing a lot of tax paid bonus shares. So SOFY2013 is a good base date to work from.
Year Imputation Credits Available (SOFY) Declared Net Profit Implied Imputation Credit Attached Dividend paid Over Year 2013 $2.9m $115.0m $32.2m $112m 2014 $32.5m $212m $59.4m $173m 2015 $45.6m $47m $13.1m $260m 2016 $16.1m
I always prefer to think in 'per share' figures rather than the above very large absolute numbers. $69m is equivalent to 5.0cps. The final dividend for FY2014, paid in the FY2015 year, was 8.3cps. The available imputation credits just before it was paid (at SOFY2015) were worth $45.6m, or 3.3cps.
3.3cps of imputation credits can support a fully imputed net dividend of: 3.3/0.28 = 11.8cps
The actual final dividend for FY2014 was 8.3cps. So there were excess imputation credits which could be used to support the special dividend for FY2015 paid later.
This year, the actual final dividend for FY2015 has been declared at 8.4cps in conjunction with a special divdend of 2.5cps: a grand total of 10.9cps. However, imputation credits available amount to only $16.1m this time, equivalent to 1.17cps.
1.17cps imputation credits will support a fully imputed dividend of 4.2cps. I think that MRP have until 31st March to make sure their imputation account is in credit (Harvey I hope will correct me if that is wrong!). But it is clear this time there are no imputation credits to spare (in fact there is a deficit), unlike last year. This leads me to suspect there will be no more fully imputed special divdends for FY2016 after the one due for payment on 30th September 2015.
SNOOPY
Has anyone an idea as to why the share price fell 11 cents yesterday? One would think that a reduction in the manipulation of the bank rate by the Reserve Bank would put the sp UP. And why, in a free market economy, do we have the Reserve Bank able to fiddle the interest rate at which I can lend or borrow money? All most peculiar.
ex dividend only reason really, but should go up slowly again, really should be over $3 by end of the year (especially with interest rate cuts still on the cards)
today, 2 October, we are back down to the issue price. More or less. Any ideas as to why? The six update briefings planned are sorely needed. But will they do any good? Are we now going lower? Any ideas?
I'm not sure about the answers to your questions, but the Energy companies haven't been quite the safe-haven that I expected in the current down-turn. I sold out of MRP some time ago at a nice profit and out of MEL recently as well at a very nice profit. There's no telling imo what this Bear / correction will turn up, better I think to be on the sidelines and buy weakness as it emerges, or if necessary wait to buy back in on a confirmed reversal to an uptrend.
Jmho, dyodd.
BAA
One of the questions I have been asking myself is, is the company really in the same position it was over 1 year ago? (when the price was around 2.50, before the election)
The answer (in my view) is absolutely not, they are argubly in a much better position... there is no immediate threat of regulation (and this is still remote even in the next election), power plants are being withdrawn from the market, meaning prices will eventually have to increase, demand is still (slowly) growing, the threat of tiwai point shutting down is put to bed at least for a little while. and MRP has arguably some of the best (if not, the best) power plants in the country, not to mention excellent management, and I don't need to even touch on the great dividend stream.
So why such a big slump from the $3.5x or so that MRP was earlier this year? yes, this was arguably a 'expensive' price, but from an investor (not trader/charting point of view) I am not entirely sure why we are back at IPO price (not even sure why we are under $3 really)