Conclusion based on FY2015 Data Perspective
Quote:
Originally Posted by
Snoopy
This share should be valued over the long term on its ability to pay dividends only. The low ROE figure is not sufficient to be sure of growth given a ten year timeframe. The Warren Buffett style growth model won't fit as a result. Yet actually, there is something wrong with this analysis as I have presented it. It deserves a closer look.
The 'closer look' revealed that the ROE was actually spectacular. So that meant the Warren Buffett style growth model could be applied after all. Until the 2015 result came out and destroyed any recognisable eps and margin trends! This doesn't mean that MRP is not a good investment though. It just means I have to use a different valuation model to find out.
The valuation model I like to use in these circumstances is the average dividend over the business cycle method. In the case of MRP I am restricted to five years of data. Going back any further is IMO not useful because much of the geothermal power generation that makes MRP the company it is today was not in place before FY2011 (FY2010 was when the 140MW Nga Awa Purua station came on stream).
Nevertheless 'average value of dividends' does not allow for the company's ability to generate 'thin air capital'. If a company was never going to grow then this 'thin air capital' could be regarded as a bonus dividend stream. MRP has been able to commission two brand new significant geothermal power stations out of thin air capital since FY2010. And they have consent to build more (on the Taheke Geothermal Field, NE of Rotorua with local iwi co-ownership). Shareholders have the ability to fund MRP's growth without injecting any new cash capital into the company. I think that fact of the company has 'extra value' that is not reflected in the normalised 'earnings per share' figures.
SNOOPY
FY2015 Gross earnings yield valuation
Quote:
Originally Posted by
Snoopy
Nevertheless 'average value of dividends' does not allow for the company's ability to generate 'thin air capital'. If a company was never going to grow then this 'thin air capital' could be regarded as a bonus dividend stream. MRP has been able to commission two brand new significant geothermal power stations out of thin air capital since FY2010. And they have consent to build more (on the Taheke Geothermal Field, NE of Rotorua with local iwi co-ownership). Shareholders have the ability to fund MRP's growth without injecting any new cash capital into the company. I think that fact of the company has 'extra value' that is not reflected in the normalised 'earnings per share' figures.
A couple of interesting statistics from FY2012, a year without an unusual river inflow. Mighty River Power had a 51.4% capacity utilisation from their hydro stations and a very impressive 94% capacity utilisation from their geothermal stations. This gives an idea of the relative importance of the two kinds of generation in relation to total energy generated by MRP. Since the commissioning of the latest geothermal station (Ngatamariki) in 2013/2014, MRP have enough revalued capital on the books to build yet another 'free' geothermal power station if they so choose. Let's say this potential new station could deliver 100MW. By how much would that increase the base generating capacity of MRPs portfolio?
1044MW Hydro (existing) x 0.514 = 537MW (effective)
463MW Geothermal (existing) x 0.940 = 435MW (effective)
100MW Geothermal (new) x 0.940 = 94MW (effective)
Hence the effective new capacity increase is:
94 / (537+435) = 10%
OK that new power station is not yet built, or even hinted that it will be started. But I would argue that MRP already has this new hidden value built into the company. The company is effectively 10% bigger than its current production capacity, and could up size by 10% seemlessly if management so chose to do it.
So I take my previous valuation based on eps flow alone:
11.74/ (0.06 x 0.72) = $2.72
and up it by 10% to take account of the power station on the books that could be built now:
$2.72 x 1.1 = $2.99
By my reckoning $2.99 is my best 'investment estimate' of where the value of MRP sits right now.
SNOOPY