Analysts talk up Contact bonanza
01 September 2006
By MARTA STEEMAN

A capital repayment to Contact Energy's 95,000 shareholders of up to $1.15 billion is being talked of.


The electricity producer posted a $281 million profit 10 days ago.

Analysts say shareholders could get back between $290 million and $1.15 billion, which would be worth between 50 cents and $2 a share. A buyback of shares is considered a tax-efficient means of returning the capital. The return would probably happen before the end of June, Contact's balance date.

Its size will depend on the outcome of a strategic review by chief executive David Baldwin. This follows the abandonment of a merger with Origin Energy.

The review is expected to be completed by the end of the year, analysts say.

Mr Baldwin said last week the company was reviewing its dividend policy and capital structure. He has not ruled out a capital return.

At the February 2005 annual meeting, chairman Grant King, who is also chief executive of Origin, ruled out a capital return.

AdvertisementAdvertisementThe review will set out expected spending on investments such as power plants and fuel supply.

But analysts say any big capital expenditure projects in the next three or four years seems unlikely because the projects being investigated take time to develop.

If Contact returned capital this year it had the option of going back to shareholders in several years when a power plant or another development required funding.

They say Contact has too little debt and too much equity for a company of its type, and therefore its balance sheet was inefficient and its capital structure not the best. Debt is considered cheaper than equity.

First New Zealand Capital analyst Jason Lindsay estimates Contact could return up to $1.15 billion. Contact has 576.7 million shares on issue, resulting in a capital return of $1.99 a share.

Goldman Sachs JBWere analyst Peter Sigley suggested a capital return of about 50c a share, which would cost $288 million.

Mr Sigley said Contact generated a huge amount of cash from its renewable hydro and geothermal power generation and was likely to remain cash rich.

It had significant opportunities for "chunky" investment in power plants. But Mr Sigley estimated any investment would be few years off.

"I think they could return a reasonable level of capital and still keep some options open," he said.

Tyndall Investment equities manager Rickey Ward said institutional shareholders in Contact and analysts he had talked to expected some sort of capital return. Origin's lacklustre annual result this week increased the likelihood because Origin needed the cash.

He hoped for some announcement or indication at the annual meeting on October 19, though others thought it might be closer to Christmas or at the half-year result in February.

BT Funds management analyst Paul Richardson said at the annual meeting institutions would be questioning the company on capital structure, including a return of capital and the dividend policy.