When reading recommendations like this, I really wonder if those pointy heads at 'X' (Craigs in this case - but not wanting to single out Craigs as I think other full service brokers do the same) take the trouble to look outside of their discounted cashflow spreadsheets. I notice the 'out' line of 'a key risk being government regulation'. But guess what? 'Government regulation' - in some form - is actually a certainty. And that fact immediately renders all of those Craigs recommendations as invalid.
It is quite clear to me that the government, be in National or Labour lead, is on the path to a low carbon power generation future. Within ten years, the Huntly power station that we know today will be closed down. Technically those Rankine Boilers are at the end of their design life already. So there will either have to be:
1/ A massive technical refit, which the government as controlling shareholder is not likely to be willing to fund and/or will vote down, OR
2/ The fuel and carbon costs will mean that Huntly will be unable to compete with Onslow, or whatever renewable battery system is built in its place.
Either way, Huntly is a 'zombie asset' as I see it.
The government got stuck into both Contact Energy and Meridian Energy last year for 'gaming the power supply system' (spilling water to raise the marginal power price). In the past the gentailers have been major beneficiaries of wholesale power price spikes which devastate their insufficiently hedged stand alone power retailer competition. Furthermore Genesis has been a major beneficiary of longer lasting high wholesale power prices from 'dry years'. The government has sent a clear message that NONE OF THIS BEHAVIOUR WILL IN FUTURE BE TOLERATED! So windfall peak wholesale pricing games will be done away with, by using wholesale price caps (that is effectively what Onslow, or its equivalent 'battery' will be).
Once you accept that Huntly is a 'zombie power station' and that Huntly generated 3,736GWh of energy over FY2022, - 54% of all energy generated by Genesis in that year - , then you can see what a massive disadvantage Genesis will have when competing with the other gentailers going out into the future. All of their windfall profits from dry years will be gone. And they will be 'wholesale price takers' from other retailers as they scramble to secure supply for their retail customer base, (which in my view they will struggle to retain). Consequently the 'high yields' that have brought Genesis to the top of the brokers recommendation pile will be likely be halved (as a best guess).
Genesis is currently trading on a PE of about 14. But if you back out the value of Kupe, which on a per share basis will likely settle at somewhere between 50cps and 80cps (say 60c as a best guess), then the underlying PE of the gentailer part of Genesis will be trading at a PE of about 20 in the market today. A non growth PE should be closer to 10. So I think fair value for Genesis shares, currently trading at a market price of $3 is somewhere around:
($3.00 - $0.60)/2 +$0.60 = $1.80
That equates to a massive downside risk from where it is trading at around $3 , and makes the 'head in the sand' 'carry on as you' are spreadsheet valuation by Craigs of $3.71 look silly.
Genesis is not the only Gentailer that has profits at risk from the battery story paradigm. Here are the numbers I ran for Contact Energy.
https://www.sharetrader.co.nz/showth...l=1#post973765
Consequently I would say that any broker that produces a lofty valuation of a gentailer with the 'get out clause' 'subject to government regulation' should do a bit more work and price up what that 'government regulation' risk actually is - in dollar terms- , BEFORE advising clients to go 'overweight' in the power sector.
SNOOPY
who nevertheless holds CEN and MCY shares , but regard myself as 'slightly underweight' in the power sector.