Thin Air Capital since EOFY2014 (FY2020 perspective)
Quote:
Originally Posted by
Snoopy
Mercury has already calculated how much thin air capital they have accumulated over the last few years. I think it is a fair assumption that if we take this figure for any time period, then multiply it by a factor of:
784/1083 = 0.72
then this will give us an estimate of the thin air capital accumulated, but not booked, by Contact Energy over the same period.
I have previously stated that I am not considering any thin air capital that may (or may not) arise from Contact's geothermal assets. Focussing on Contact's hydro assets only, requires us to look at what happened to the 'thin air capital' of Mercury's hydro assets only.
FY2014 was a significant year for Contact Energy, because it represented the last year in which they constructed a brand new geothermal power station, Te Mihi. Contact raised new capital for this project in FY2011, via a share issue, with a view to having the company in the right capital shape when Te Mihi construction came to an end. Contact's capital structure following that construction project can therefore be thought of as 'optimised'. It therefore makes sense to only consider the 'thin air' capital growth path from that Te Mihi construction completion date, starting with FY2015 and going forwards.
What does 'optimised capital position' mean in terms of numbers? The position at EOFY2014 was: Assets $6,183m, Shareholder Equity $3,582m
Equity Ratio as at EOFY2014 = $3,582m / $6,183m = 58%
The 'thin air' capital growth for Mercury hydro assets is shown below. Both Mercury and Contact operate in the same electricity market. That is why I consider the thin air capital accumulated by Mercury as an indicative factor to use for the thin air capital accumulated (but not recognised) by Contact management over that same period. Information in the table below is derived from posts 1349 and 1308 in the Mercury thread.
Mercury Energy |
Reval. Hydro & Thermal Assets ($m) |
Reval. Geothermal & Other Generation Assets ($m) |
Total Revalued Generation Assets |
2015 |
355 |
142 |
497 |
2016 |
82 |
55 |
137 |
2017 |
0 |
52 |
52 |
2018 |
0 |
55 |
55 |
2019 |
151 |
99 |
250 |
2020 |
253 |
43 |
296 |
Total |
841 |
|
That $841m of thin air incremental capital raised was based on a total hydro generating capacity of 1059MW (Post1347, Mercury Thread). The total Contact Energy hydro electric generation capacity is 784MW (my post 1514). So I can determine my 'best guess' at the thin air capital accumulated by Contact Energy subsequent to the FY2014 balance date by ratio:
$841m x 784MW/1059MW = $623m
Debt can be borrowed against this 'thin air capital'. This means the total amount of investment capital (equity and debt) that can be utilised as a result of this 'thin air capital' is:
$623m / 0.58 = $1,074m
Now, what sort of power station could Contact build with that?
SNOOPY
CEN valuation FY2020 adjusted for 'thin air capital'
Quote:
Originally Posted by
Snoopy
The budget for constructing Te Mihi (166MW) back in FY2013 was $623m (refer to my post 617).
It doesn't look like Contact have accumulated enough thin air capital to construct another Te Mihi. But I reckon there might be enough in the kitty to build a 100MW geothermal station. Assuming that station had a utilisation rate of 85%, by how much would the power generating capacity of Contact Energy increase?
Energy Generated by New Station Over one year:
(100MW x 0.85) x 25 x 365 x (1/1000) = 776GWh
776GWh / 8449GWh = 9.2%
So this is the multiplication factor we need to increase the value of CEN shares by if we are to include in that the earnings value of the new station that 'could be built', without recourse to raising new capital from shareholders.
Note the normalised earning valuation does not make any allowance for off balance sheet 'thin air capital' that has been accumulated by Contact Energy. Making this adjustment I get a fair value for Contact Energy of:
$5.58 x 1.092 = $6.09
Given that Contact is trading well below that figure, it looks like an 'accumulate' at current market prices. Yet, ever the bargain hunter, I would be on the look out for 20% discount to fair value. That equates to $4.87. I say Contact would be a 'strong buy' should the current market volatility see the share price drop to that level.
Quote:
Originally Posted by
Snoopy
Scenario Basis Financial Year |
eps (A) |
Scenario dps (B) |
Difference (A)-(B) |
Divie Capital Component (C) |
Unimputed Tax Bill (D) |
Difference (B)-(C)-(D) |
2011 |
21.7c+3.9c |
19.0c |
+6.6c |
0c |
0c |
19.0c |
2012 |
24.7c+3.9c |
38.0c |
-9.4c |
9.4c |
2.6c |
26.0c |
2013 |
28.1c+3.9c |
39.0c |
-7.0c |
7.0c |
2.0c |
30.0c |
2014 |
27.7c+3.9c |
39.0c |
-7.4c |
7.4c |
2.1c |
29.5c |
2015 |
22.4c+3.9c |
39.0c |
-12.7c |
12.7c |
3.6c |
22.7c |
2016 |
22.1c+3.9c |
39.0c |
-13.0c |
13.0c |
3.6c |
22.4c |
2017 |
18.7c+3.9c |
39.0c |
-16.4c |
16.4c |
4.6c |
18.0c |
2018 |
18.2c+3.9c |
39.0c |
-16.9c |
16.9c |
4.7c |
17.4c |
2019 |
24.3c+3.9c |
39.0c |
-10.8c |
10.8c |
3.0c |
25.2c |
2020 |
17.7c+3.9c |
39.0c |
-17.4c |
17.4c |
4.9c |
16.7c |
Total |
264.6c (E) |
369.0c (F) |
|
|
|
226.9c |
Business Cycle Imputation Rate (E)/(F) |
|
71.70% |
|
|
|
|
The expected average dividend per year, net of tax is therefore: 226.9 / 10 = 22.7cps (net)
Using a tax rate of 28c this is equivalent to a gross income of: 22.7cps /(1-0.28) = 31.5c
If we assume that a business cycle investment 'gross return' of 4.5% is required, then this equates to a CEN share price of:
31.5c /0.045 = $7.00
So $7.00 is therefore 'fair value'.
However, I am only predicting the 'superimputation' effect to last for two years. If we look out over ten years, then eight of those ten years will only have regular imputation. This means the business cycle value of Contact shares is actually a weighted average of the two parts of my valuation, calculated like this:
( 2($7.00) + 8($5.62) )/10 =
$5.90
Quote:
Originally Posted by
Snoopy
Adding a new geothermal station of 226MW that would operate at 94% availability would lift Contacts generating capacity by:
(226MW x 0.94) / (403MW + 425MW) = +25.7%
With the 'thin air capital' future earnings improvement factor now calculated, we can at last nail down a fair value for CEN shares, (according to this model at least.)
$5.90 x 1.257 = $7.42
CEN are trading at $8.06 as I write this. I therefore consider CEN shares on the market today to be 8.6% overvalued.
SNOOPY
discl: hold CEN, but these are not overvalued enough for me to consider selling down. I won't be buying more at today's prices though
CEN vs MCY FY2020 'Head to Head' (Value)
Quote:
Originally Posted by
Snoopy
FY2017 |
Contact Energy |
Mercury Energy |
No. Shares |
715.5m |
1,400m |
Share Price |
$5.50 |
$3.39 |
Normalised eps |
18.7c |
12.0c |
Normalised PE |
29.4 |
28.3 |
Normalised NPAT Margin |
6.4% |
10.6% |
ROE (Assets at Cost) |
18.9% |
55.6% |
Bank Debt |
$1,527m |
$1,107m |
Min. Debt Repayment Time |
11.4 years |
6.6 years |
Snoopy's Fair Share Price Valuation |
$5.58 |
$2.85 |
Market Premium or Discount to Fair Value |
-5.2% |
+19.0% |
Notes:
1/ ROE for MCY of 55.6% not a misprint.
2/ CEN valuation does not contain an allowance for 'thin air capital', while MCY does. But now that CEN has closed down their baseload Otahuhu B station, the power stations that are left may start to develop 'thin air capital' as MRPs power stations do now. Nevertheless up until now it has been Contact policy not to create 'thin air capital'.
3/ Share prices taken from the market close on 30-09-2017.
The snapshot view shows a clear 'investor value advantage' for Contact Energy, although the PE ratio gap has now closed substantially. Could this
still be a downstream effect of the discounted share placement from the Origin Energy sell down still affecting the market? This sale occurred early in the previous financial year (announced 4th August 2015) yet it still could be casting a very long shadow. More likely is the relatively poor operational result for Contact over FY2017. Note that the indicators of 'Net Profit margin' and 'MDRT' still favour Mercury Energy though. Yet despite being relatively weaker, Contact is still in a strong position given the relative security of cashflows in the energy markets in which it operates.
As I write this both shares are trading below their September 30th valuations ( CEN is $5.35 and MCY is $3.22. ) This means the the variations from my fair value are a 4.1% discount (CEN) and a 13.0% premium (Mercury). The Mercury premium is not sufficient to make me sell up though. I rather like the fact that of late when Mercury has had a good year it has not been so good and Contact and vica versa. Holding both seems to have given me a natural hedge against fluctuating values in the electricity market.
FY2020 |
Contact Energy |
Mercury Energy |
No. Shares |
718.1m |
1,400m |
Share Price (17-12-2020) |
$8.06 |
$6.18 |
Normalised eps |
17.6c |
11.7c |
Normalised PE |
45.8 |
52.8 |
Normalised NPAT Margin |
6.1% |
11.8% |
ROE (Assets at Cost) |
8.4% |
9.2% |
Bank Debt |
$1,198m |
$1,291m |
Min. Debt Repayment Time |
9.4 years |
7.9 years |
Snoopy's Fair Share Price Valuation |
$7.42 |
$6.34 |
Current Market Premium or Discount to Fair Value |
+8.6% |
-2.6% |
Notes:
1/ Both CEN valuation and MCY valuation contain adjustment factors to include the value of 'thin air capital' accumulated. For Mercury this is +23.4%. For Contact Energy the adjustment factor is +25.7% It is no longer Contact policy to revalue their assets annually. Hence Contact's balance sheet does not contain 'thin air capital', but Mercury's balance sheet does.
2/ The FY2020 financial statements of both companies were compiled on the assumption that the Tiwai Point Aluminium Smelter is to remain as a going concern.
My snoopshot view shows a clear 'investor value advantage' for Mercury Energy. Despite the stratospheric PE ratios now commanded by both companies, Mercury is trading modestly below fair value. My modelling shows that both companies are now in a position to build substantial new power stations at no additional cost to shareholders. In fact Mercury is doing this right now., and has the ability to build yet another similar sized wind power station when Turitea is finished. In the case of Contact, the new Tauhara Geothermal Station is fully planned (250MW output) and costed ($600m build cost) and consented, with the O.K. from head office all that is keeping construction starting. IMO these renewable energy projects are being priced by the market as already built and operating. Once they come on stream, those stratospheric market PEs for MCY and CEN should reduce.
Mercury Energy currently owns a strategic stake in 'Tilt Renewables', a listed entity that develops and operates wind farms in New Zealand and Australia. 'Tilt Renewables' is currently the subject of undisclosed market interest, that may result in Mercury's interest being sold at a good profit. I have not included any speculation from such a deal in my valuation for Mercury directly. However I have included the capital currently committed to Tilt as 'spent;' on construction of Puketo wind farm (still on the drawing board). So in my judgement ascribing any extra value to the Tilt renewable stake now would be both speculative and also double counting the capital I have already modelled as committed to Puketo.
Important profitability indicators of 'Net Profit margin' and the debt risk indicator of 'MDRT' continue to favour Mercury Energy.
As I write this, both shares are trading above their September 30th 2020 market valuations ( CEN $6.65 and MCY $5.10.) The recovery in share price since that date is primarily because of the political will shown to accommodate an extension to the time frame of the Tiwai Point closure. However, as I write this, the official position remains that the Tiwai Point aluminium smelter will cease production by August 2021. This means there is a substantial downside risk for both share prices if an extension to the Tiwai Point closure date cannot be negotiated,
The current Contact Energy market price premium is not sufficient to make me sell up. I rather like the fact that of late when Mercury has had a good year it has not been so good and Contact and vica versa. Holding both seems to have given me a natural hedge against fluctuating values in the electricity market.
SNOOPY
Geothermal Plant Capacity Utilisation (FY2019/FY2020)
Quote:
Originally Posted by
Snoopy
Contact Energy Hydro |
Station Generation Capacity |
Contact Energy Geothermal |
Station Generation Capacity |
Contact Notes |
Clyde |
464MW |
Ohaaki |
48MW |
Roxburgh |
320MW |
Te Huaka |
28MW |
Completed FY2010 |
|
|
Wairakei |
145MW |
|
|
Poihipi |
65MW |
|
|
Te Mihi |
166MW |
Completed FY2014 |
Total |
784MW |
Total |
452MW |
Effective Capacity Factor |
0.514 |
Effective Capacity Factor |
0.940 |
Total Operationally Adjusted |
403MW |
Total Operationally Adjusted |
425MW |
|
An issue has emerged on the MCY thread regarding Mercury claiming a high capacity utilisation of their geothermal power generation stations of 95%. Yet when actual figures are calculated from operational data , the utilisation never rises above 70%, a huge difference. One theory I have to explain this is that Mercury does not fully own all of their geothermal power stations. Therefore the maximum amount of power that can be generated reflects the equity percentage ownership of the of those power stations, not the total power station output. One way to check this theory is to look at Contact Energy. Contact is also a significant operator of geothermal power generation in the volcanic plateau of the North Island. However, unlike Mercury, Contact fully owns the output of all their geothermal power stations. So if Mercury is correct in their 95% capacity utilization claim, this kind of capacity utilisation figure should apply to Contact Energy as well. Let's see if it does.
Let's run the calculation for FY2020 using the reported 'equity accounted generation base', which in this instance is the same as the whole generation base.
https://contact.co.nz/-/media/contac...020.ashx?la=en (See page 7)
The geothermal generation capacity at Contact is 452MW (table above). If run at 100% capacity for twelve months those five geothermal stations can generate
452MW x 24 hrs/day x 365 days/quarter = 3,959,520 MWh/year
So the Contact geothermal stations, over FY2020, operated at: 3,333,000 / 3,959,520 = 84.2% capacity
As a check, I shall do the same calculation for the FY2019 year
3,256,000 / 3,959,520 = 82.2% capacity
That is consistent with the following year. But why is the capacity utilisation a full ten percentage points lower than Mercury has been achieving?
SNOOPY