Contact Energy - CEN Chart

[Jaa]

Question about why otahuhu plant was closed.

It's older, high cost, surplus to requirements, and not very renewable

Sparky wasn't that old!

It was commissioned in January 2000, upgraded in 2005 from 385MW to 404MW and ceased generation at the end of September 2015. The typical lifespan of a combined cycle gas power station at 30 years is double that. What a debacle.

Contact's upgrade to SAP, which was forced (by Origin), expensive and ultimately customer value destroying also shows how relatively poorly the company was run by overseas management. Any update on that fiasco at the meeting?

The question is, have things changed?

PS: Thanks for the updates from the meeting Blendy, much appreciated.

[Blendy]

A pleasure. I realize most of the discussion focused on how they are running the company now and moving forward, and not on what amazing things are going to drive the share price dramatically or dividend increase. I feel the summary is that it's a sensible long term business operation. Slow and steady.

And no, no update on the SAP/Origin fiasco.

[Snoopy]

And no, no update on the SAP/Origin fiasco.

SAP I am lead to believe reaches right back inside Contact, and I can't say anything about any internal ructions it has created. But on the 'customer interface' side. as a recently returned Contact Energy customer, I do have something to say.

Years ago, I was with Contact under their old 'Empower' brand. Being 'old school' with my bill paying, I enjoyed my monthly walk down to the post office to pay 'over the counter'. I was somewhat incensed then to find that Empower intended to charge me for paying my own bill in the near future. Around that time I was 'door knocked' by Genesis Energy. Not only did they offer me a better price without a time contract. In addition they had a 'brownie points' scheme whre I could collect points and buy trinkets on line. Genesis also said that I could continue my monthly saunter to the post office without being charged extra to clear my account. So I quickly signed up.

A few days later I got a 'weak call' from Contact offering me a small cash incentive to stay. I worked out that if I stayed I would be better off in cash terms for four months, but thereafter I would be losing money on the comparative deal. So a Genesis Energy customer I became. I never did quite figure out the Genesis 'brownie points' system. I seemed to run into hurdles that my ancient computer at home could not jump. When it was abolished, I just lost all my points. That gave me a surprisingly negative feeling about Genesis, even though this was a 'benefit' that was never a deal clincher in the first place. Subsequently Genesis started charging me for paying my own bill as Empower had threatened to do, and that rankled. However one thing that kept me at Genesis was their customer billing system.

Each month my power bill had a graph of all my power use over the last year grouped in two monthly columns. I liked to see that, and I think the two month grouping tended to iron out fluctuating weather conditions over winter and points in time where I had had periods away from home. Then about three months ago I was 'door knocked' by Contact. The salesperson made a persuasive pitch with an up front cash incentive for a two year contract (around $150 IIRC). The price for power was more or less the same. But a 20% discount offer verses the 10% on offer for Genesis made a big difference. They also said I would no longer be charged for walking to the post office, a small point, but one I liked.

A few days later I got the 'counter call' from Genesis. A 15% discount, but for a one year contract, same power price. As a retail customer my expectation is for power charges to fall in the next two years. But I still figured a 10% fall 'in the hand' was better than a nebulous expectation of lower power prices at some time. So a Contact customer again I have become.

On receiving my first Contact Energy bill, I was pleasantly surprised to see my 'power use graph' was still there. However, the expectation is that I will be supplied monthly power use figures rather than two monthly. Monthly figures I expect will say more about the weather for that month rather than my power usage. Also Contact will make use of my 'slightly smart meter' to supply 'calendar month' power use figures rather than 'billing period' power use figures. I just say I can't forsee much benefit - for me- in doing things this way. Perhaps Contact benefits in some upstream way? Just because you have more 'customer data', that doesn't automatically make it more useful. But time will tell. Personally I think the Genesis billing system gave more useful information to me, yet I don't recall Genesis Energy ever crowing about it!

SNOOPY

[Snoopy]

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 forom 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 forseeable 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 impuatation 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

In the interests of 'minimising work' in the future, I want to redo my valuation of CEN based on purely historical performance.

Financial Year	eps	dps (imputed)
2009	27.0c	28.0c
2010	25.3c	28.0c
2011	22.4c	25.0c
2012	24.6c	23.0c
2013	27.5c	23.0c
2014	27.1c	25.0c
2015	22.0c	26.0c
2016	22.2c	20.0c
Total	198.1c	198.0c
Average	24.8c	24.8c

Interestingly, although the timing of the cashflows varies, the actual valuation, based on the 'average imputed dps paid' in one instance, and the 'average eps' in the second instance will be identical! Over an extended period, if a company has a policy of paying out 100% of earnings as dividends this is what you might expect. So it is comforting to see that 'expectation' actually does equal 'reality' in this case.

Using a tax rate of 28c this is equivalent to a gross income of: 24.8cps /(1-0.28) = 34.4c

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

34.4/0.06 = $5.73

So $5.73 is therefore 'fair value'. Note that this is higher than my previous 'Forecast Dividend Perspective' valuation by 23cps. Nevertheless I believe my previous perspective on future dividends is probably more accurate going forwards. I am sticking to my $5.50 valuation. In this case the extra work I did to get the more accurate valuation was IMO worth it.

SNOOPY

[troyvdh]

Given a div at 6 % why is CEN becoming a 'dog'...on big volume to...bets me.

[fish]

Given a div at 6 % why is CEN becoming a 'dog'...on big volume to...bets me.

I would prefer to call it a cheap buy.
Quite honestly I dont believe people are selling on fundamentals-its value to me is that it will be the biggest part of my retirement fund-and it got a lot bigger today.
If people want to sell at this price I am very happy to buy.
I am buying for the dividend yield for long-term returns

[kiora]

I would prefer to call it a cheap buy.
Quite honestly I dont believe people are selling on fundamentals-its value to me is that it will be the biggest part of my retirement fund-and it got a lot bigger today.
If people want to sell at this price I am very happy to buy.
I am buying for the dividend yield for long-term returns

But that's why investors are selling down dividend producers and parking it in "safe haven'or looking at growth orientated investments aren't they?

[couta1]

But that's why investors are selling down dividend producers and parking it in "safe haven'or looking at growth orientated investments aren't they?

I don't buy this story otherwise why are low yield growth stocks like Sum and RYM getting the same hammering?personally I reckon the NZX is in correction mode across the board right now, that as well as US Instos moving funds back to their own country now Trump is in and promising economic growth etc etc. There is simply not enough appetite from local investors to help stem the tide but once the tailwinds of January start blowing I'm sure things will turn.

[kiora]

I don't buy this story otherwise why are low yield growth stocks like Sum and RYM getting the same hammering?personally I reckon the NZX is in correction mode across the board right now, that as well as US Instos moving funds back to their own country now Trump is in and promising economic growth etc etc. There is simply not enough appetite from local investors to help stem the tide but once the tailwinds of January start blowing I'm sure things will turn.

Maybe???Doesn't sit with where the the NZD/USD exchange rate is though does it?

[fish]

Maybe???Doesn't sit with where the the NZD/USD exchange rate is though does it?

There are so many maybes.
In my opinion fear has become the main driving force and thats given us all a chance to buy a cheap dividend stock that is relatively safe.
Trump is the reason for most of this fear.
My belief is that he said things to get votes and is a populist.
We just arent going to get a wall dividing the USA from Mexico( unless its a metaphoric wall that doesnt work).I doubt that the USA will isolate itself
Maybe we get more immigration from the usa and the uk.
Maybe electricity demand will be reduced from global warming and greater efficiency.
Contact can produce electricity cheaply from renewable resources and whatever likely happens will keep making profits and maybe they will grow.
I doubt if the valuation carefully considered and kindly provided by snoopy has actually changed this week