Contact Energy - CEN Chart

[horus1]

Surely if one generator doesn't pay for transmission neither should the local guy. Local generation is far better than remote generation . So solar should not pay for transmission, if it does over time people will leave the networks more and more. Solar is being installed and so it should be.

[BlackPeter]

Surely if one generator doesn't pay for transmission neither should the local guy. Local generation is far better than remote generation . So solar should not pay for transmission, if it does over time people will leave the networks more and more. Solar is being installed and so it should be.

You sure you thought that through?

Neither the local guy (as producer) nor any other generator pay for the network, but why should the local guy get more for the energy produced than the generator? Given your background you should know that the typical price in NZ per KWh produced is between 3 and 7 cents ... and I absolutely agree, this is what the local guy should get as well - not a cent more.

Giving him any more though is just stealing from the other consumers. Sure, this is what our lefties like to do, but I don't see any justification for this theft. It benefits nobody.

And - of course, if the local guy still needs energy from the net (like when everybody else needs it as well, when it is dark and / or cold), than (s)he needs to pay for the network as anybody else - and actually should pay more, because they only use the network during peak load (a quite expensive scenario).

[GTM 3442]

If I were building a new house I would be looking at 12v lighting run from a solar/battery combination.

Separate circuits entirely from the mains. With some 240v emergency-only stuff.

And checking out the possibility of doing the same for heat pumps.

[BlackPeter]

If I were building a new house I would be looking at 12v lighting run from a solar/battery combination.

Separate circuits entirely from the mains. With some 240v emergency-only stuff.

And checking out the possibility of doing the same for heat pumps.

Just go for it - probably cheaper and environmentally friendlier than throwing $150k or so (depending on your system) in paper notes into the log burner ... considering that the paper money around here is made of plastic . On the other hand - don't forget ... you need to replace the expensive batterie bank every 8 to 10 years ... maybe the idea with burning the money was not that bad at all ...

[Snoopy]

Contact used to be the most 'retailer friendly' operator for people who generate their own power. Not sure if they still are. Current information on the subject may be found from the URL below.

https://www.contact.co.nz/personal/p...utedgeneration

I see that Contact have now changed to a 'two tier' payment system. If your in house generation system creates less than 10kW of power, they will pay you 8c/kWh for any excess energy you want to export to the grid. If your system has a generating capacity of greater than 10kW, they say 'contact us'. This is code for saying:

"We will put up with dribs and drabs being fed into the power grid. It looks good for PR purposes. But if you want to get serious about rooftop power production, we don't want to know you."

It is all long gone from the respective websites of course. But something twitched in my brain overnight about Contact offering a flat 12c/kWh for power fed into the network as recently as two years ago. IIRC Meridian topped that with an offer to buy power at around 18c/kWh. However the Meridian offer was limited to an an 'energy cap'. When that was exceeded the price paid dropped to a much lower rate, somewhere around 8c/kWh. I remember going into this in some detail at the time, because I was considering 'doing a Horus' myself.

If my memory is correct, it shows how quickly the gentailers have taken control of the situation. The apparent eco-credentials of Contact have been greenwashed down the gutter with the new pricing regime. I certainly feel for the likes of Horus who invested big time in their own home generation, only to have their system economics squashed by gentailer greed.

SNOOPY

[Harvey Specter]

If my memory is correct, it shows how quickly the gentailers have taken control of the situation. The apparent eco-credentials of Contact have been greenwashed down the gutter with the new pricing regime. I certainly feel for the likes of Horus who invested big time in their own home generation, only to have their system economics squashed by gentailer greed.

SNOOPY

Dont forget the lines companies are getting in on the act to, to limit the benefit of surplus solar generation (any solar generation since they want to charge an extra fee to anyone feeding into the grid, regardless of how much they feed in and when).

[Snoopy]

Dont forget the lines companies are getting in on the act to, to limit the benefit of surplus solar generation (any solar generation since they want to charge an extra fee to anyone feeding into the grid, regardless of how much they feed in and when).

The lines companies bill the gentailer/retailer who in turn bill the end line customer. I guess one thing to be said for having different companies in charge of "the network" and "the retailing" is that retailers on their own have no particular incentive to do the bidding of the lines company, at least in theory. In practice, because the lines companies are a monopoly, the retailer has little choioce but to do their bidding.

SNOOPY

[Snoopy]

Time to update my capitalised averaged eps valuation (excluding special dividends) for Contact, given the subdued outlook for FY2016 and the impending and current share buyback program.

Compared to last year, the special dividend ($367m total) has created an ongoing parcel of extra debt going forwards that must be serviced. Contact doesn't declare in their annual report the interest rate they pay over their whole debt portfolio. But we can:

1/ take last years total interest paid ($90m) AND
2/ divide this by the end of year term debt ($1,219m + $531m) LESS
3/ the capital paid out in the special dividend (because that payout only occurred just before the end of the financial year).

and calculate:

$90m / [($1,219m + $531m) - $367m] = 6.5%

So 6.5% is our indicative interest rate that Contact currently pays.

The extra interest bill because of the capital return is therefore: $367m x 0.065 = $24m

I am estimating that 20m Contact shares will be bought back and cancelled when the current share buyback program is finished.

Given EBITDA is forecast to be little changed from last year, we can now work out the expected NPAT for Contact for FY2016.

	FY2016 Adjustments
EBITDA (normalised FY2015)	$549m
less DA (FY2015)	-$204m
less I	-($98m+$24m)
Total EBT	$233m
less Tax at 28%	-$62m
NPAT forecast FY2016	$161m

We can now divide that forecast profit figure by the reduced number of shares 'post buyback' to get a forecast eps figure.

$161m / (733m -20m) = 22.6c

And that eps figure can take its place in our multi year eps table below.

Year	eps
2009	27.0c
2010	25.3c
2011	22.4c
2012	24.6c
2013	27.5c
2014	27.1c
2015	24.3c
2016	22.6c

I get an average eps of 25.1c (net) over the eight year representative period.

25.1c (net) is equivalent to 25.1/0.72 = 34.9c (gross).

Using a target 6% gross return figure for 'fair value'.

34.9c/0.06 = $5.82

It is no wonder then that I have been buying in recent months and see today's closing price of $4.70 as a bargain. Even if you use this years forecast manic depressed profit on its own (ie assuming profits will never recover and remain low) I still get a valuation of:

[22.6/0.72]/0.06 = $5.23

Mr market can do what he likes as far as I am concerned. I have no problem taking advantage of him.

Actual FY2016 results are out, so time to update my valuation model.

First a few words for those who joined the Contact Energy (CEN) party late.

CEN operates in an industry where the weather plays a big part. No-one can predict for sure what the weather, and hence resultant rainfall, and consequently inspired power demand will be on the overall network. In addition there are competitive market pressures which see customers happy to flip flop between different retailers at regular intervals. However, Contact have been operating in volatile weather and consumer markets for many years. Furthermore, the energy market is relatively mature. Rather than try and guess what the weather and consumer market share for Contact in the future might be, I prefer to use 'actual data' from the last eight years, and superimpose the current forward dividend policy on that data. Because I am considering eight years of data, this will produce an 'averaging effect'. Thus, although I predicting a particular 'fair share value' for Contact, we can expect the market value of CEN shares to fluctuate both above and below that figure.

Gentailers have a lumpy demand for investing in new power stations. Right now we are at the bottom of the lump. Generally a gentailer must keep reinvesting in their generation plant to keep viable. But right now we are in a place where the big reinvestment is done. This means that the annual depreciation and amortization charges on assets do not need to be reinvested right now. That means 'extra cashflow' for Contact Energy, and 'extra money' that is available to pay out to shareholders, over and above earnings? How much extra money?

In FY2016 the depreciation and amortisation charge was $201m, and the offsetting capital expenditure was $128m. There are currently 715.5m Contact shares on issue. So the 'windfall cashflow' per share in FY2016 amounts to:

($201m-$128m)/ 715.5m = 10cps

Of course not all of this is available to be paid out. Contact currently has a relatively high debt load. Management have indicated that they wish to use some of that cashflow to pay down debt. But add 10cps to last years earnings of 22cps and you get 32c. There is plently of headroom there to indicate paying a cash dividend of 26cps per year going forwards will not be a problem.

Below I present my corrected earnings picture for the last eight years. You will note that:

1/ I have deleted last years 50cps special dividend from the record, because it will not be possible to repeat that into the future.
2/ The 'Scenario Dividend Per Share Column' represents a prediction of an ongoing dividend of 26cps being paid into the foreseeable future.
3/ The (A) - (B) difference column, if negative, represents the amount of the projected dividend not covered by imputation credits. This is important, because a dividend paid without imputation credits is in accounting terms, equivalent to giving shareholders their own capital back (equal to the amount of the unimputed dividend) complete with a tax bill. This is generally bad for investors. It is necessary to make a negative adjustment to account for any expected tax to be paid on the unimputed dividend component.
4/ The capital component of the dividend is the portion of shareholder equity being returned to shareholders. This will need to be removed from the dividend return calculation. Because to pay it is to return to shareholders money on the balance sheet that they already have, so it isn't a shareholder benefit.
5/ The unimputed component tax bill column, represents the income tax charged on share capital that is expected to be paid by the shareholder. A 28% tax rate is assumed. Note that if the (A)-(B) differnce is positive there is no extra tax bill. That's because in such a year, the dividend is fully imputed.
6/ The final column represents the dividend per share adjusted for any extra tax obligation.

Scenario Basis Financial Year	eps (A)	Scenario dps (B)	Difference (A)-(B)	Divie Capital Component (C)	Unimputed Tax Bill (D)	Difference (B)-(C)-(D)
2009	27.0c	26.0c	+1.0c	0c	0c	26.0c
2010	25.3c	26.0c	-0.7c	0.7c	0.2c	25.1c
2011	22.4c	26.0c	-3.6c	3.6c	1.0c	21.4c
2012	24.6c	26.0c	-1.4c	1.4c	0.4c	24.2c
2013	27.5c	26.0c	+1.5c	0c	0c	26.0c
2014	27.1c	26.0c	+1.1c	0c	0c	26.0c
2015	22.0c	26.0c	-4.0c	4.0c	1.1c	20.9c
2016	22.2c	26.0c	-3.8c	3.8c	1.1c	21.1c
Total	198.1c	208.0c				190.7c

The expected average dividend per year, net of tax is therefore: 190.7 / 8 = 23.8cps (net)

Using a tax rate of 28c this is equivalent to a gross income of: 23.8cps /(1-0.28) = 33.0c

If we assume that a business cycle investment 'gross return' of 6% is required, then this equates to a CEN share price of:

33.0/0.06 = $5.50

So $5.50 is therefore 'fair value'. Naturally this valuation assumes no gross disruption to the market, i.e. Tiwai Point remains a going concern

SNOOPY

[Snoopy]

The expected average dividend per year, net of tax is therefore: 190.7 / 8 = 23.8cps (net)

Using a tax rate of 28c this is equivalent to a gross income of: 23.8cps /(1-0.28) = 33.0c

If we assume that a business cycle investment 'gross return' of 6% is required, then this equates to a CEN share price of:

33.0/0.06 = $5.50

So $5.50 is therefore 'fair value'. Naturally this valuation assumes no gross disruption to the market, i.e. Tiwai Point remains a going concern

I have had requests before from those who don't want to read the whole nitty gritty. As above I am calling $5.50 fair value. Mr Market has been consistently bekow this figure. It is probably correct that the share should trade below this average figure for most of the businesss cycle, simply because of the threat of Tiwai closing. If Tiwai did close the CEN share price might take 8-10 years to get back to where it is today. IOW it would take that long for demand in the rest of the country to take up the slack. I recognise this as a possibility. But I am prepared to hold my investment in CEN at a suitably discounted price (i.e the actual market price) as risk compensation.

I see that Contact CEN020 bonds are trading at a yield of 3.21%. To me that is a 'crazy low' yield for a company with a BBB credit rating. Buying the CEN shares on a more than 6% yield makes so much more sense. If interest rates rise, those bondholders buying in a today's prices will surely lose capital. But shareholders will too, becasue Contact is a 'yield share'.

If as a result of interest rates rising, Contact shareholders required a 6.5% yield then my average share price valuation would change to:

33.0c / 0.065 = $5.08

With possible interest rate raises in mind, $5.08 would be the maximum price that I would be prepared for CEN shares in the latter half of CY2016..

SNOOPY

[sb9]

Did I see 475??? goodness getting close to that origin sell down price of 450 (from memory)...