Contact Energy - CEN Chart

[Snoopy]

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.

Time to update my capitalised averaged eps valuation (excluding special dividends) for Contact, given the subdued outlook for FY2016 and the impending and current share buyback program.

Compared to last year, the special dividend ($367m total) has created an ongoing parcel of extra debt going forwards that must be serviced. Contact doesn't declare in their annual report the interest rate they pay over their whole debt portfolio. But we can:

1/ take last years total interest paid ($90m) AND
2/ divide this by the end of year term debt ($1,219m + $531m) LESS
3/ the capital paid out in the special dividend (because that payout only occurred just before the end of the financial year).

and calculate:

$90m / [($1,219m + $531m) - $367m] = 6.5%

So 6.5% is our indicative interest rate that Contact currently pays.

The extra interest bill because of the capital return is therefore: $367m x 0.065 = $24m

I am estimating that 20m Contact shares will be bought back and cancelled when the current share buyback program is finished.

Given EBITDA is forecast to be little changed from last year, we can now work out the expected NPAT for Contact for FY2016.

	FY2016 Adjustments
EBITDA (normalised FY2015)	$549m
less DA (FY2015)	-$204m
less I	-($98m+$24m)
Total EBT	$233m
less Tax at 28%	-$62m
NPAT forecast FY2016	$161m

We can now divide that forecast profit figure by the reduced number of shares 'post buyback' to get a forecast eps figure.

$161m / (733m -20m) = 22.6c

And that eps figure can take its place in our multi year eps table below.

Year	eps
2009	27.0c
2010	25.3c
2011	22.4c
2012	24.6c
2013	27.5c
2014	27.1c
2015	24.3c
2016	22.6c

I get an average eps of 25.1c (net) over the eight year representative period.

25.1c (net) is equivalent to 25.1/0.72 = 34.9c (gross).

Using a target 6% gross return figure for 'fair value'.

34.9c/0.06 = $5.82

It is no wonder then that I have been buying in recent months and see today's closing price of $4.70 as a bargain. Even if you use this years forecast manic depressed profit on its own (ie assuming profits will never recover and remain low) I still get a valuation of:

[22.6/0.72]/0.06 = $5.23

Mr market can do what he likes as far as I am concerned. I have no problem taking advantage of him.

SNOOPY

[Fisherking]

Time to update my capitalised averaged eps valuation (excluding special dividends) for Contact, given the subdued outlook for FY2016 and the impending and current share buyback program.

Compared to last year, the special dividend ($367m total) has created an ongoing parcel of extra debt going forwards that must be serviced. Contact doesn't declare in their annual report the interest rate they pay over their whole debt portfolio. But we can:

1/ take last years total interest paid ($90m) AND
2/ divide this by the end of year term debt ($1,219m + $531m) LESS
3/ the capital paid out in the special dividend (because that payout only occurred just before the end of the financial year).

$90m / [($1,219m + $531m) - $367m] = 6.5%

So 6.5% is our indicative interest rate that Contact currently pays.

The extra interest bill because of the capital return is therefore: $367m x 0.065 = $24m

I am estimating that 20m Contact shares will be bought back and cancelled when the current share buyback program is finished.

Given EBITDA is forecast to be little changed from last year, we can now work out the expected NPAT for Contact for FY2016.

	FY2016 Adjustments
EBITDA (normalised FY2015)	$549m
less DA (FY2015)	-$204m
less I	-($98m+$24m)
-$233

Year	eps
2009	27.0c
2010	25.3c
2011	22.4c
2012	24.6c
2013	27.5c
2014	27.1c
2015	24.3c
2016	22.6c

I get an average eps of 25.1c (net) over the eight year representative period.

25.1c (net) is equivalent to 25.1/0.72 = 34.9c (gross).

Using a target 6% gross return figure for 'fair value'.

34.9c/0.06 = $5.82

It is no wonder then that I have been buying and see today's closing price of $4.70 as a bargain. Mr market can do what he likes as far as I am concerned. I have no problem taking advantage of him.

SNOOPY

SNOOPY, your posts are interesting and always valuable, but it's past my bedtime before I've finished reading most of them. Could you give us the abbreviated version?

[jonu]

SNOOPY, your posts are interesting and always valuable, but it's past my bedtime before I've finished reading most of them. Could you give us the abbreviated version?

It's screaming BUYME. Brief enough FK?

DYOR; not intended as investment advice; conditions apply...etc, etc

[Snoopy]

SNOOPY, your posts are interesting and always valuable, but it's past my bedtime before I've finished reading most of them. Could you give us the abbreviated version?

My averaged business cycle valuation $5.82. Market close $4.70. Market discount on offer to fair valuation 19%.

SNOOPY

PS subject to all those assumptions laid out in my calculation of course

[LAC]

I enjoy the long detailed posted by Snoopy

[Snoopy]

I enjoy the long detailed posted by Snoopy

Happy to give both long and short versions. One size doesn't fit all. Just understand that the short version contains assumptions that I think you should know about (and you can find those in the long version!) :-)

SNOOPY

[workingdad]

I enjoy the long detailed posted by Snoopy

Me too thank you

[Baa_Baa]

SNOOPY, your posts are interesting and always valuable, but it's past my bedtime before I've finished reading most of them. Could you give us the abbreviated version?

Snoops posts are the most informative and insightful FA analysis around here imho. It's not about getting them read them before bedtime, it's about the days afterwards that it takes mere mortals like myself to work through understanding them, it's an education, we are being generously taught the finer points of FA. An archive of Snoops posts would form the basis of a curriculum on FA. I hope Snoops doesn't start abbreviating his analysis.

Respectfully, to Snoops.
BAA

[Snoopy]

It's screaming BUYME. Brief enough FK?

DYOR; not intended as investment advice; conditions apply...etc, etc

To be a 'screaming buy' I look for the future event where a total return of 40% (capital gain and dividends) is reasonably possible within two years. if you regard $4.60 as the likely bottom at $5.82 as a likely average cycle valuation, then this implies that at the very top of the cycle CEN might get to:

$5.82 + ($5.82-$4.60) = $7.04

Let's say $7 round figures. Personally, with the continuing uncertainty of Tiwai, I can't see that share price getting that high. But then again, I didn't expect the share price to get as low as $4.60 either.

So let's say that mid cycle valuation of $5.80 (round figures) is a reasonably possible two year target. Add in two annual dividends of 26.5c. Buy in at $4.75 today and you are looking at a reasonably possible return of:

($5.80-$4.75) + (2x $0.265)= $1.58

$1.58/$4.75 = 33% return (over two years).

Or put another way:

$4.75(1+r)^2= ($5.80 + $0.53)

Solve for 'r', and I get an annual compounding return rate of 15.4%

So not quite a 'screaming buy'. But certainly a 'buy' IMO as part of a balanced portfolio.

I can understand some investors being wary because of the on-going Tiwai point situation. But sizeable returns do require some risk. And it is to a large extent the ongoing Tiwai point uncertainty that has caused this investment opportunity. If Tiwai point came out tomorrow and committed themselves to another 15-20 years in business, then the share price of these gentailers would rocket overnight. And with such a very rapid gain in share price, the investment opportunity we have today disappears.

SNOOPY

discl: hold CEN

[Harvey Specter]

Does anyone have any research on which of the gentailers are long generation/short retail. If Huntly closes, these will be the ones that earn big profits. Until Tiwai closes, then those long retail will be the winners.

If I was a gambling man, I would put money on Tiwai being open 5 years from now.