Contact Energy - CEN Chart

[JAYAY]

Notice how CEN traded at around 5-20 all day yesterday then someone bought ****loads just before close pushing the price to 5-30. Lo and behold a good result published this morning. Inside info??

[macduffy]

We always suspect such moves just before announcements. Sometimes, though, it's just a matter of someone/ones taking a punt on a good result. After all, it wasn't a secret that the result would be released today!

[Snoopy]

Have just re-referenced my 28 April 2011 cash issue prospectus. On page 22 of that offer document is the following quote:

"The project is expected to cost $623m, which includes construction of the Te Mihi power station (including two steam turbine generators and associated equipment), electrical switchyard and transmission connection works, incremental steamfield works on the Wairakei geothermal system, including drilling of geothermal wells and other ancilliary works."

Conspicuous by its absence is any mention of buying outright or leasehold the underlying land.



My view has been strengthened that Te Mihi, built by Contact Energy is a good base figure to work from when estimating the replacement costs of other geothermal power stations excluding land costs.

Have been perusing my FY2013 report, and noting the wind down of future capital spending once Te Mihi is commissioned. Have also heard those reports about Meridian projected to pay out 140% of profit or something for several years into the future. The argument is that depreciation is so high on the eternally lasting hydro dams and cashflow so good that such a policy is sustainable. That got me wondering if a similar situation now applies to Contact Energy. Most of the big capital spending looks to be done, so can we expect bumper dividends from Contact going out into the future too?

I calculate normalized earnings for FY2013 of 27.5cps. At $5.40 CEN is sitting on a PE of nearly 20, not cheap. Dividends paid over the last twelve months were 25cps so we are looking at a net dividend yield of 4.69% which grosses up to around 6.6%. Is it just me, or does that look fully priced in a static electricity market?

Of course if Contact were to suddenly start paying out more than their profit on a sustainable basis then the dividend yield might suddenly look better. Now that Te Mihi is built, there must be whole lot more cashflow available to allow CEN management to do just that - right?

SNOOPY

[Food4Thought]

Notice how CEN traded at around 5-20 all day yesterday then someone bought ****loads just before close pushing the price to 5-30. Lo and behold a good result published this morning. Inside info??

I agree. I also believe that inside information is allowing large buyers/firms to play an unfair game in the NZX. NZ is so small, I really question the constant sudden entries and exits prior to announcement dates. You raise a valid question JAYJAY. I guess it is not fair when it is not us knowing the information, and it does throw question on the market authenticity. Perhaps raising a valid point of confidence and trust? Which they say is of utmost importance for share/money markets.

[CJ]

Have been perusing my FY2013 report, and noting the wind down of future capital spending once Te Mihi is commissioned. Have also heard those reports about Meridian projected to pay out 140% of profit or something for several years into the future.

I believe they have signaled higher dividends going forward for this very reason.

NOt sure about their Hydro but MER has recently finished 1 in 40 year maintenance which is why they believe the high payout is sustainable going forward. YOu would have to look at the same for CEN.

[Snoopy]

Of course if Contact were to suddenly start paying out more than their profit on a sustainable basis then the dividend yield might suddenly look better. Now that Te Mihi is built, there must be whole lot more cashflow available to allow CEN management to do just that - right?

I am not so sure that turning on the dividend taps will be possible at CEN. Net interest expense was $66m over FY2013. But that net figure takes into account $44m of interest that was capitalized, presumably largely built into the Te Mihi power station asset base. Once Te Mihi construction is finished there will be no more interest capitalization until construction of the next power station for which there are no firm plans. However overall company short and long term debt debt has not changed radically (note 10) and in fact has gone up from $1,304m at EOFY2012 to $1,370m at EOFY2013. So I can see the net interest bill in FY2014 being well over $100m. And profits will reduce in round figures after tax by 0.7 x $40m = $28m as a result. That in turn translates to eps of some 23.5c going forwards.

Logically this seems wrong as less investment should translate to more cash available for we shareholders. But could it be with this capitalization of interest program winding down, we shareholders might be looking at a cut in dividends going forwards?

SNOOPY

[CJ]

your mixing up profits and cash with your less investments should mean more cash.

You need to look at free cash flows. Then look at their dividend policy (not sure if it is set out nicely like MER's).

MER does apparently have lower debt than competitors, again supporting the high dividend.

[Snoopy]

I believe they have signaled higher dividends going forward for this very reason.

This capitalization of interest thing with CEN has got me rattled a bit. It is one thing having the capacity to greatly bump up your dividends to boost the share price. It is another thing entirely if, long term, it is wise to do so.

Take the overall short and long term debt of some $1,370m as an example. With a net interest payout of $66m for FY2013, that means that CEN are 'net paying' only 4.81% on those funds. I would encourage CEN to lock in all the borrowing they can at those rates. But take out the capitalised interest component and suddenly the interest paid on that balance jumps to:

$110m / $1,370m = 8%

If that is the real underlying interest rate that CEN are paying, wouldn't they and we long term shareholders) be better off just paying off the debt rather than boosting dividends to short term dividend stripping shareholders?

SNOOPY

[Snoopy]

you are mixing up profits and cash with your less investments should mean more cash.

You need to look at free cash flows. Then look at their dividend policy (not sure if it is set out nicely like MER's).

MER does apparently have lower debt than competitors, again supporting the high dividend.

It does appear that capitalising interest has reduced the historic net interest bill, and has artificially boosted past profits?

SNOOPY

[CJ]

It does appear that capitalising interest has reduced the historic net interest bill, and has artificially boosted past profits?

it would have yes. The profit relates to operating activities so rightly under IFRS, interest in relation to the uncommissioned asset is capitalised. That extra interest should be offset by the revenue of the new plant once commissioned (if not, it was a bad investment).

Interest of 8% sounds about right - look at their bonds for comparison.

Paying dividends vs repaying debt is an age old question - not sure if there is a "correct" answer.