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  1. #1821
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    Default Valuation: From a FY2020 projected dividend 'capitalised valuation' perspective. Pt2

    Quote Originally Posted by Snoopy View Post
    Below I present my corrected earnings picture for the last ten years. You will note that:

    1/ I have deleted the FY2015 50cps special dividend from the record, because it will not be possible to repeat that into the future.
    2/ The 'Scenario Dividend Per Share Column' represents a prediction of an ongoing dividend of 100% of free cash flow being paid into the foreseeable future. However, in the two years this policy has been in existence, only 39cps has been paid out. So where the 100% of operating free cashflow exceeds that figure I have capped the dividend payout to 39cps.
    3/ The (A) - (B) difference column, if negative, represents the amount of the projected dividend not covered by imputation credits. This is important, because a dividend paid without imputation credits is in accounting terms, equivalent to giving shareholders their own capital back (equal to the amount of the unimputed dividend) complete with a tax bill. This is generally bad for investors. It is necessary to make a negative adjustment to account for any expected tax to be paid on the unimputed dividend component.
    4/ The capital component of the dividend is the portion of shareholder equity being returned to shareholders. This will need to be removed from the dividend return calculation. Because to pay it is to return to shareholders money on the balance sheet that they already have, so it isn't a shareholder benefit.
    5/ The unimputed component tax bill column, represents the income tax charged on share capital that is expected to be paid by the shareholder. A 28% tax rate is assumed. Note that if the (A)-(B) difference is positive there is no extra tax bill. That's because in such a year, the dividend is fully imputed.
    6/ The final column (Column D) represents the 'effective' dividend per share adjustment for any extra tax obligation from paying tax on unimputed distributions.

    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 19.0c +2.7c 0c 0c 19.0c
    2012 24.7c 38.0c -13.3c 13.3c 3.7c 21.0c
    2013 28.1c 39.0c -10.9c 10.9c 3.1c 25.0c
    2014 27.7c 39.0c -11.3c 11.3c 3.2c 24.5c
    2015 22.4c 39.0c -16.6c 16.6c 4.6c 17.8c
    2016 22.1c 39.0c -16.9c 16.9c 4.7c 17.4c
    2017 18.7c 39.0c -20.3c 20.3c 5.7c 13.0c
    2018 18.2c 39.0c -20.8c 20.8c 5.8c 12.4c
    2019 24.3c 39.0c -14.7c 14.7c 4.1c 20.2c
    2020 17.7c 39.0c -21.3c 21.3c 6.0c 11.7c
    Total 225.6c (E) 369.0c (F) 182c
    Business Cycle Imputation Rate (E)/(F) 61.14%
    .

    The expected average dividend per year, net of tax is therefore: 182 / 10 = 18.2cps (net)

    Using a tax rate of 28c this is equivalent to a gross income of: 18.2cps /(1-0.28) = 25.3c

    Now we come to a critical point in this analysis - the choosing of an indicative interest rate that allows us to value Contact on the basis of being an ongoing income stream, albeit not quite a 'bond equivalent'. I have previously used a figure of 5.5%. But that was in a climate of investment interest rates of some 3.5%. Interest rates have fallen by at least 200 basis points since then. OTOH the previously unthinkable is happening in that the Tiwai Point aluminium smelter is closing, and the power market is consequently in a state of flux as to how particularly Contact will be able to extricate the consequential surplus energy from their Clutha River power stations at Clyde and Roxburgh while transmission north is constrained. To balance these competing factors, I have assessed that a gross return of 4.5% iThe bulk of these tax credits came about in FY2016, because of $204m of impairments net of tax relating to the closure of the Otahuhu Power Station, an assessment that the Taheke Geothermal field is unlikely to be developed in the foreseeable future (from a June 2016 perspective) and a write down in the value of inventory gas. I have calculated above that $63m of those tax credits have been used up, which means that $97m - $63m = $34m are yet to materialise. That means there are probably two years worth of 'Superimputed dividends' for Contact Energy shareholders to come. What value of superimputation is appropriate? I am going with the average that I calculated in the first quoted post on this thread of 71.64%.s now appropriate for Contact Energy.

    If we assume that a business cycle investment 'gross return' of 4.5% is required, then this equates to a CEN share price of:

    25.3c /0.045 = $5.62

    So $5.62 is therefore 'fair value'.

    Readers should note that $5.62 represents 'business cycle neutral' fair value. We could argue that we are currently at 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.

    $5.62 x 1.2 = $6.74

    Contact Energy is trading at $6.25 as I write this post. This technique would suggest that Contact Energy is now 11% overvalued (above fair valuation), not unexpected given the plunge in interest rates of late is probably worrying yield investors, and not out of line with the broad overvaluation of the NZX as a whole.

    But does a 'capitalised dividend valuation' give the full picture?
    Note: The incremental profit in the table below of 3.9cps, represents the change in gross profit spread out over ten years that would result if the business cycle imputation rate were to increase from 61.24% to 71.64% (ref Post 1820).

    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) 71.64%

    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

    SNOOPY
    Last edited by Snoopy; 25-02-2021 at 12:37 PM.
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  2. #1822
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    Default Equity Ratio: FY2010 to FY2020

    Quote Originally Posted by Snoopy View Post
    Utility type companies can carry a higher level of debt than others because of the greater certainty of cashflows. As to whether Contact are paying the special dividend to be 'capital efficient' I am not sure. But on one thing I do agree with Hoop. I do like to see a company keep their overall debt levels low.
    With interest rates headed for unprecedented lows, I may have to revise my opinion on what equity ratios that I think of are acceptable, Yet the picture at Contact over the last eleven years has been unexpectedly consistent.

    Equity (A) Assets (B) Equity Ratio (A)/(B)
    FY2010 $2,777m $5,148m 0.5394
    FY2011 $3,236m $5,643m 0.5735
    FY2012 $3,418m $6,112m 0.5592
    FY2013 $3,537m $6,197m 0.5708
    FY2014 $3,582m $6,186m 0.5790
    FY2015 $3,171m $6,089m 0.5208
    FY2016 $2,823m $5,652m 0.4995
    FY2017 $2,778m $5,455m 0.5093
    FY2018 $2,727m $5,311m 0.5135
    FY2019 $2,782m $4,954m 0.5616
    FY2020 $2,621m $4,896m 0.5353

    SNOOPY
    Last edited by Snoopy; 11-09-2020 at 08:25 PM.
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  3. #1823
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    Default Assets valued on a cost basis

    Quote Originally Posted by Lizard View Post
    I think you will find the change on page 60 of the 2010 annual report, where it explains that the 2007 valuation gains were reversed in a move back to cost basis:

    "Contact has elected to make a voluntary change in accounting policy in relation to the measurement basis for generation plant and equipment and move to a cost basis as it is reliable and more relevant. The change in accounting policy has been applied retrospectively to 1 October 2004, the date of Contact’s transition to NZ IFRS and the date of acquisition of 51.4 percent of the shares in Contact by Origin. Fair value at 1 October 2004 is considered deemed historical cost owing to the impracticability of determining actual cost back to the original asset purchase date. As a result of the change, the revaluation reserve at 1 October 2004 ($1,547.6 million) has been transferred to retained earnings. In addition, the revaluation in 2007($401.1 million) and the consequential deferred tax ($120.3 million) have been reversed."
    In FY2010 Contact changed their policy from revaluing assets every three years according to their earnings capability, to what I have quoted above. However, what more recent shareholders may not know is that there were earlier revaluations of generation assets that were not reversed.

    Revaluation of Generation Assets

    FY1999 $673m
    FY2002 $843m
    FY2004 $550m
    Total $2,066m

    These revaluations are incorporated into the baseline valuations adopted by Contact at EOFY2010. Assets are funded by a combination of equity and debt. So using the equity ratio at EOFY2010, we can calculate the proportion of these revaluations that are supported by equity.: 0.5394 x $2,066m = $1,114m. Why does this matter? Because when we calculate the return of shareholder equity as presented in AR2010:

    $155m / $2,777m = 5.6%

    Then compare that return on equity to that achieved with the generation assets revaluations removed:

    $155m / ($2,777m - $1,114m) = 9.3%

    the results are very different. The picture of how efficiently Contact is using its assets to generate profits changes significantly.

    SNOOPY
    Last edited by Snoopy; 11-09-2020 at 09:09 PM.
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  4. #1824
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    Default

    Wow nice 38c jump today.......... $7 by Friday

  5. #1825
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    Nothing has changed for CEN since March's sudden drop so expecting a re-rate back to $7 plus from here...........

  6. #1826
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    cen been on fire last few days must be pricing in done smelter deal?
    one step ahead of the herd

  7. #1827
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    Quote Originally Posted by bull.... View Post
    cen been on fire last few days must be pricing in done smelter deal?
    Isn't it nice to see that even the promise of taxpayer money is already flowing directly into the share portfolios? Good as gold.

    Both of our big parties seem to be hell bent to keep subsidizing mining as well as electricity share prices ...
    ----
    "Prediction is very difficult, especially about the future" (Niels Bohr)

  8. #1828
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    Default

    Quote Originally Posted by BlackPeter View Post
    Isn't it nice to see that even the promise of taxpayer money is already flowing directly into the share portfolios? Good as gold.

    Both of our big parties seem to be hell bent to keep subsidizing mining as well as electricity share prices ...
    I believe if Electricity or Fuel are not kept high could start an avalanche of deflation.

    Every time oil become cheap amazingly Govt uses the opportunity to rise extra taxes on fuel.
    Last edited by dreamcatcher; 06-10-2020 at 12:24 PM. Reason: spelling

  9. #1829
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    Default

    do the brains trust have any comments on latetest run if it continues to push past $7.55?

  10. #1830
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    10th October 2019 CEN SP $9.04 ................plenty of room for a re-rate especially with 0% interest rates looming

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