Contact Energy - CEN Chart

[Harvey Specter]

I was thinking that CEN could pay more provisional tax than they expect to use for this income year, then transfer any excess to last years terminal tax or the first installment of next years provisional tax. I could do that as a private person. But whether a company could do that, I am not sure.

You can but!

Can't transfer back as that tax is already paid (and distributed as ICs)
Can transfer if forward but then you don't pay any tax then so have no ICs to attach to next years div.

I am sure they modelled all scenarios and determined they are likely to have IC shortfall in future so have to take hit now (and maybe in future too).

[Xerof]

Lets get real on these dividend policies - if they only pay tax on profits, but declare dividends as a high % of FCF, then these will always be at best partially imputed. The party was only ever going to last for the honeymoon period after the floats.

Remember, the largest shareholder in most of these companys has no interest in IC's. Still very good yields

Oh, this is CEN thread so second para not relevant to this particular company

[Snoopy]

Time to update my FY2015 earnings forecast, given today's news release from Contact.

1/ Take EBITDAF.

$525m

2/ Remove one off profit items.

$0m (nothing material declared)

3/ Remove Depreciation and Amortization

2x $101m = $202m (twice half year figure)

4/ Take off annual interest charge.

$77m (assume same as FY2014)

5/ Calculate tax payable at 28%

$69m

6/ Calculate NPAT (normalised estimate).

=$177m

From this the foreacst earnings per share are:

$177m / 733m = 24.1cps

An 11c interim dividend has already been paid. So it looks like the final dividend will be 13cps, down 2cps on last year.

I made the above estimate with the Contact Energy August market update. But now we have the actual figures it is time to tidy my estimate up.

1/ Take EBITDAF.

$525m

2/ Remove one off profit effects.

+0.72x$24m (Add back one off cost from retail transformation project)

3/ Less Depreciation and Amortization

-$204m

4/ Less annual interest charge.

-$98m

5/ Less tax payable at 28%

-$67m

6/ Calculate NPAT (normalised estimate).

=$173m

From this the actual normalised earnings per share are:

$173m / 733m = 23.6cps

To my surprise the final dividend of 15cps was retained from last year (albeit this time unimputed). Coupled with the 11cps interim dividend, the normal dividend from FY2015 of 26cps represents 110% of net profit.

SNOOPY

[Snoopy]

New dividend policy is to pay out 'eps' as 'dps'. Looking at the results from 2008 to date it looks like 2008 is an outlier. Further investigation leads me to believe that this particuarly good year was made possible due to limited capacity on the Cook Strait cable. This cable has now been enhanced and the infrastructure conditions that supported the 2008 result look unlikely to be repeated. So I will drop the 2008 result out of my alternative future scenarios for forecasting purposes.

Average eps (last 6 years): 25.7cps (NPAT)

=> Gross eps = 25.7/0.72= 35.6c

Valuation of CEN based on steady state earnings and an acceptacle gross dividend payment rate of 6%

35.6/ 0.06 = $5.94

That is a bit lower than I had before, due to my adjusting earnings downwards for FY2014. It is still well above the $4.65 placement price of today though!

My 'normalised' eps figures for the years following the GFC are like this:

Year	eps
2008	42.9c
2009	27.0c
2010	25.3c
2011	22.4c
2012	24.6c
2013	27.5c
2014	27.1c
2015	23.6c

As previously explained I am striking of the result from FY2008 as an outlier that is not indicative of future results. The seven year earnings average for the rest is now 25.4c (net) or 25.4c/0.72 = 35.2c (gross).

Using an indicative gross interest rate of 6%, my share price valuation is now:

35.2c/0.06 = $5.87

That is 7c down on the figure I had before, working with data only up until FY2014. It isn't surprising the value has reduced given the poor result from FY2015. Nevertheless it is still relatively stable, because the new data point is still only one data point out of seven.

SNOOPY

[Snoopy]

As previously explained I am striking of the result from FY2008 as an outlier that is not indicative of future results. The seven year earnings average for the rest is now 25.4c (net) or 25.4c/0.72 = 35.2c (gross).

Using an indicative gross interest rate of 6%, my share price valuation is now:

35.2c/0.06 = $5.87

That is 7c down on the figure I had before, working with data only up until FY2014. It isn't surprising teh value has reduced given the poor result from FY2015. Nevertheless it is still relatively stable, because the new data point is still only one data point out of seven.

FY2015	Contact Energy	Mighty River Power
No. Shares	733.4m	1,400m
Share Price	$5.13	$2.61
Normalised eps	23.6c	11.1c
Normalised PE	21.7	23.5
Normalised NPAT Margin	7.1%	9.3%
ROE (Assets at Cost)	10.5%	117%
Bank Debt	$1,750m	$1,177m
Min. Debt Repayment Time	10.1 years	7.6 years
Snoopy's Fair Share Price Valuation	$5.87	$2.99
Market Discount to Fair Value	-13%	-13%

Notes:

1/ ROE for MRP of 117% not a misprint.
2/ CEN valuation does not contain an allowance for 'thin air capital', while MRP 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 middle of the afternoon in the market today. MRP share price reduced by 11c to allow for upcoming final dividend. (CEN is already ex the final dividend).
4/ Contact balance sheet is ex the payment of the 50c special dividend on June 23rd, but prior to payment of the 15c final dividend. This is why Contact is more indebted, as reflected in the 'minimum debt repayment time' ( Total bank debt/NPAT ).

With all that , in relative terms, each investment at this afternoon's price is equally as good as each other. It is possible to buy both at a 13% discount to Snoopy's fair value. In one way I am annoyed because I was hoping to figure out which was the better one to buy. In another way I am relieved because it shows that perhaps my valuation method is not too far out of whack with the view of Mr Market. IOW Mr Market is doing his job valuing these two shares appropriately!

SNOOPY

[Snoopy]

I have been a Contact Energy shareholder from way back, right from the public float. Starting with a modest holding I have built it up over the years, always buying never selling.

I reread the AGM addresses about all of that strong cashflow. Reading between the lines I think we shareholders could be looking at a modest lift in fully imputed dividends in the coming year, or possibly even a share buyback. At $5.20 we are on an historic gross dividend yield of some 6.7%.

Despite owning some CEN since the start, my median holding time is only 2.5 years. With today's buy, my average holding price is now $4.73. Roll in the two latest cash dividends and my compounding gross rate of return over those 2.5 years has been 7.9%. That could even be a little below market, but given the kind of investment CEN is, I am satisfied.

I did my cause no good by purchasing some shares on market during the 2011 rights issue. The rule of thumb of buying during a capital raising is that you are more likely to get a good deal because of the greater number of shares up for sale. I bought a reasonable tranche of shares at $5.92. That looked good at the time, because this was the first time in ages the CEN share price had slipped below $6. That same purchase doesn't look so clever today! The market has rerated much of the growth out of Contact since.

Nevertheless Contact remains a solid pillar in my overall portfolio, and a near 7% yield (hopefully rising through cost control) is a lot better than I would get at the bank. And on the potential downside from the single buyer electricity model, I still feel Contact has less to lose than the other listed power companies. Now that cash dividends have resumed, I look forward to my CEN dividends covering my power bills into the future.

SNOOPY

PS, Yes, I am fairly economical with my power use!

When going through my 'Contact' folder today I came across an extraordinary fact. I had thought of my self as a 'buy and hold' investor as regards Contact. It would be more truthful to say I am a 'buy and buy' investor. Incredibly I have now bought into Contact on 18 separate occasions and never sold any! Granted many of those buys were for very modest amounts when I was participating in the dividend reinvestment plan. So I am not quite the gazillionaire you might think. But it is an extraordinary record for me nevertheless.

My fifteen years with the company have had their (relative) highs and lows. Although I have been with Contact for 15 years, half of my purchases (in terms of the total number of shares bought) were over the last four and one quater years. IOW my median purchase timing was back in May 2011. So how have I done? A quick look at the historical chart would show that I made my time based theortical equivalent single purchase (median purchase) when the share price was at $5.92. The current share price is $5.11 - not good! But is this really a good measure of how I have done? Let's see.

SNOOPY

[newtrader]

Thanks for your in-depth analysis SNOOPY, much appreciated!

Have you calculated your "Market Discount to Fair Value" for MEL?

[Snoopy]

My fifteen years with the company have had their (relative) highs and lows. Although I have been with Contact for 15 years, half of my purchases (in terms of the total number of shares bought) were over the last four and one quater years. IOW my median purchase timing was back in May 2011. So how have I done? A quick look at the historical chart would show that I made my time based theortical equivalent single purchase (median purchase) when the share price was at $5.92. The current share price is $5.11 - not good! But is this really a good measure of how I have done? Let's see.

Looking back at my notes, my worst purchase of Contact Energy shares was made in November 2008 when I picked up a parcel for $6.63. That doesn't look very clever now. But the share price had within a short time of that been as high as $9. So it was easy to convince myself that $6.63 was a bargain. And so it might have been. Except that post GFC a lot of the 'growth premium' was let out of the energy market. Contact as a 'steady state' earner had a very different outlook to Contact as a 'growth company'. The truth is I took my eye off the ball and assumed energy growth was going to follow the historical trend, and it didn't. So I have no-one to blame but myself for this little episode.

By contrast my best purchase was when I bought a parcel for $2.80 in December 2000. What a millennium present that little purchase turned out to be! Contact had floated at $3.10 just over a year earlier. My memory isn't good enough to remember exactly why the price declined. But I do remember thinking about those shares I bought at float time, and reasoning that if I could pick up some more Contact shares at a 10% discount that sounded like a good thing. And so it was!

What we have here are two examples of 'catching a falling knife'. In the first case I got bloodied. In the second case I got a firm grip on the handle. Which proves nothing really. The big bandage I keep in the bottom of the doghouse meant the bloodied paw was a repairable effect.

SNOOPY

[Snoopy]

Thanks for your in-depth analysis SNOOPY, much appreciated!

Have you calculated your "Market Discount to Fair Value" for MEL?

No newtrader, because I don't own any MEL! How brattish is that? I sure that I have dropped enough hints on this Contact thread to allow others to do it though! I look forward to seeing your start on the MEL thread!

SNOOPY

[Snoopy]

My fifteen years with the company have had their (relative) highs and lows. Although I have been with Contact for 15 years, half of my purchases (in terms of the total number of shares bought) were over the last four and one quater years. IOW my median purchase timing was back in May 2011. So how have I done? A quick look at the historical chart would show that I made my time based theortical equivalent single purchase (median purchase) when the share price was at $5.92. The current share price is $5.11 - not good! But is this really a good measure of how I have done? Let's see.

The period from May 2011 accounts for the funding and construction of the Te Mihi Geothermal Power Station. In June 2011 there was a 1:9 rights issue priced at $5.05. This was quite a big discount to the market price in the high $5 range at the time. So of course I took up my rights. Over that time period and in the year that followed, I purchased more shares through the dividend reinvestment plan, at $5.35, $4.95 and $4.88 respectively.

At the end of FY2015 there were 733.309m Contact shares on issue, compared to 695.068m at the end of FY2011. There were no purchases of large assets external to the company over that time. That means the same 'company assets' were now spread over a larger number of shares. So I would argue that the share price start point comparison should be adjusted to reflect that

Much of this discount is that all shareholders on the register who bought shares at $5.92, also bought the rights to buy an extra share for every nine they already owned at $5.09. And that discount is not reflected in the direct share price comparison. The corrected price taking into account the rights issue was:

{$5.09 +$5.92(9)}/10 = $5.84

This sort of thing needs to be adjusted for in any 'raw chart information'

SNOOPY