Normalised Earnings Calculation: Contact Energy 2015: Iteration 3
Quote:
Originally Posted by
Snoopy
I made the above estimate with the Contact Energy August market update. But now we have the actual figures it is time to tidy my estimate up.
1/ Take EBITDAF.
$525m
2/ Remove one off profit effects.
+0.72x$24m (Add back one off cost from retail transformation project)
3/ Less Depreciation and Amortization
-$204m
4/ Less annual interest charge.
-$98m
5/ Less tax payable at 28%
-$67m
6/ Calculate NPAT (normalised estimate).
=$173m
From this the actual normalised earnings per share are:
$173m / 733m = 23.6cps
To my surprise the final dividend of 15cps was retained from last year (albeit this time unimputed). Coupled with the 11cps interim dividend, the normal dividend from FY2015 of 26cps represents 110% of net profit.
I am sad to report I have to make a correction to the reference calculation below. I had added back the one off effect of $24 because of costs associated with the retail transformation project. However, on inspection of the segmented results, it seems these costs were never incorporated into the EBITDAF earnings figure to start with. So I should not have added them back in after all!
1/ Take EBITDAF.
$525m
2/ Remove one off profit effects.
nil
3/ Less Depreciation and Amortization
-$204m
4/ Less annual interest charge.
-$98m
5/ Less tax payable at 28%
-$62m
6/ Calculate NPAT (normalised estimate).
=$161m
From this the actual normalised earnings per share are:
$161m / 733m = 22.0cps
SNOOPY
Normalised Earnings Calculation: Contact Energy 2016: Iteration 1
Quote:
Originally Posted by
Snoopy
I am sad to report I have to make a correction to the reference calculation below. I had added back the one off effect of $24 because of costs associated with the retail transformation project. However, on inspection of the segmented results, it seems these costs were never incorporated into the EBITDAF earnings figure to start with. So I should not have added them back in after all!
1/ Take EBITDAF.
$525m
2/ Remove one off profit effects.
nil
3/ Less Depreciation and Amortization
-$204m
4/ Less annual interest charge.
-$98m
5/ Less tax payable at 28%
-$62m
6/ Calculate NPAT (normalised estimate).
=$161m
From this the actual normalised earnings per share are:
$161m / 733m = 22.0cps
Updating the normalised profit figure for FY2016:
1/ Take EBITDAF.
$523m
2/ Remove one off profit effects.
nil
3/ Less Depreciation and Amortization
-$201m
4/ Less annual interest charge.
-$101m
5/ Less tax payable at 28%
-$62m
6/ Calculate NPAT (normalised estimate).
=$159m
From this the actual normalised earnings per share are:
$159m / 715.1m = 22.2cps
SNOOPY
CEN valuation FY2016 (single year earnings basis)
Quote:
Originally Posted by
Snoopy
Updating the normalised profit figure for FY2016:
<snip>
6/ Calculate NPAT (normalised estimate).
=$159m
From this the actual normalised earnings per share are:
$159m / 715.1m = 22.2cps
The gentailers have a reputation for being 'yield' shares. The sort of thing you want to have in a portfolio if you want a steady income. Over the last couple of years the trend has been towards paying dividends out of cashflow, rather than earnings. This in turn means that most of the dividends from gentailers going out into the future will not carry full imputatiuon credits. Paying out dividends without imputation credits is nothing new. One example that comes to mind is the former Dorchester Pacific (now renamed Turners). Like other NZ finance companies, immediately post GFC, they got into terrible trouble and booked huge losses. Unlike most other finance companies they recovered and recouped their tax loss position over many years. During these years of recuperation, Dorchester paid out modest unimputed dividends. The gentailer position, as regards imputation credits on dividends , though, is quite different.
None of the big gentailers have ever been in the kind of trouble that almost sunk the entire finance industry in NZ. But most of the gentailers are coming out of a period of investment in new power stations that is now finished. Thus they have high depreciation charges (non cash) that will not require a corresponding reinvestment in new power plant in the medium term. These depreciation charges effectively become extra free cashflow. And that extra cashflow is being passed on to customers through 'top up' unimputed dividends.
Contact Energy has its own unique take on the imputed dividend issue. For many years they had been building up imputation credits on the books. Just before Origin Energy relinquished their controlling stake in Contact, these imputation credits were released in the form of being attached to a special dividend. The downstream effect of this was that due to tax payment timing issues, the following normal dividend, paid from normal business operations, was paid with no imputation credits at all! Shareholders should be assured that this is a temporary situation. With the settling down of the Contact share register, imputation credits will be resumed. Yet Contact suffers from my previously discussed point of having high positive cashflow that is in part not taxed as a result of the recent power station building program (Te Mihi Geothermal in the case of Contact) being completed. Like the other gentailers it is unlikely that dividends going forwards will be fully imputed. So an important question arises: How do you value a dividend that is only partially imputed?
My position is that the unimputed part of these gentailer dividends should not be counted in an investors return. Unimputed dividend are in effect a return of cash assets already held by the company and already owned by shareholders. Thus when Contact pays an unimputed dividend, what they are really doing is just paying your own share capital, that you already own, back. Unfortunately for shareholders, capital returned by the unimputed dividend method is taxed. I would argue that this capital tax, paid as income tax, should be taken off the investors return for the year. My position then is that unimputed dividends are not even neutral but negative for shareholders.
Companies never like reducing dividends paid to shareholders. Even if they have a poor year, they can often 'look through' that result to next years recovery and maintain their dividend. So the company 'dividends stream' is often more stable than the 'earnings stream'. In the case of Contact they have paid out an 11cps interim dividend and a 15cps final dividend in recent times. Cashflow forecasts indicate they will not need to reduce these payments, even if tax paid earnings fail to match the annual dividend payment of 11cps + 15cps = 26cps. My normalised earnings calculations show that in FY2015 eps was 22.0cps and in FY2016 is was 22.2cps. If we regard an eps of 22cps are the 'present market norm', and assume Contact do not reduce their annual dividend payment of 26cps, this points to future annual dividends of 26cps being made up of a 22cps imputed dividend component and a 4cps unimputed dividend component. Using this breakdown, we can calculated a forecast 'gross dividend' for Contact Energy going forwards as follows:
22cps/0.72 + 4cps = 30.5cps + 4cps = 34.5cps.
From this we must remove from shareholder 'return' the negative capital effect of paying tax on capital shareholders already own (the tax effect of the unimputed dividend), and the neutral effect of paying back capital that shareholders already own (the unimputed dividend itself).
34.5cps - 4cps - 0.28( 4cps ) = 29.4cps
Using a reference price of $4.73 per Contact Energy share this equates to a gross yield of:
29.4c / 473c = 6.2%
If we assume that in these days of low interest rates a 6% gross yield is an acceptable return, this leads to the fair value of a CEN share to be:
$4.73 x ( 6.2/6.0 ) = $4.89
SNOOPY