Big Profit Growth Implied for Tauhara
Quote:
Originally Posted by
Snoopy
If we assume that a business cycle investment 'gross return' of 4.5% is required, then this equates to a CEN share price of:
23.6c /0.045 = $5.25
So $5.25 is therefore 'fair value'.
Readers should note that $5.25 represents 'business cycle neutral' fair value. We could argue that we are currently, keeping in mind the increasing ten year bond rate, descending from the top of a low interest rate inspired valuation cycle. My rule of thumb would suggest a 'top of cycle' value some 20% higher than my calculated fair value. However, given we may have passed the interest rate low, I am reducing my interest rate cycle premium from 20% down to 15%
$5.25 x 1.15 = $6.04
Contact Energy is trading at $7.01 as I write this post. This technique would suggest that Contact Energy is now 16% overvalued (above fair valuation), but not out of line with the broad overvaluation of the NZX as a whole.
But does a 'capitalised dividend valuation' give the full picture? This is a 'no growth valuation', so maybe not!
To clarify, I am modelling here a no growth valuation after Tauhara is built. I am not saying no growth from today, as the current cash issue presentation (attached to the half year report), forecasts that this $580m project from here on in (funded by $400m of new equity and $180m of new debt) will produce a substantial uplift in EBITDA.
If you look back at my post 1978, I have taken the forecast $85m EBITDA uplift as incremental cashflow of $85m. I have subtracted suitable incremental depreciation of $14m and incremental interest charges of $8m. Assuming a tax rate of 28%, I can calculate an incremental net profit after tax of:
(1-0.28)x($85m-$14m-$8m)= $45m or $45m/805m = 5.6cps
That is a significant part of the 17.5cps modelled earnings total. To be more precise the forecast increase is:
5.6c / ( 17.5c -5.6c) = +47%
That sounds high. But those are Contact's own numbers, not mine.
SNOOPY