Contact Energy - CEN Chart

[Snoopy]

Cheers Snoopy. Re the overhang from Origin I'm awaiting what i hope is abetter op when /if their CEN shares hit the market at a discount.

As are many others Joshuatree. I will also buy more should that happen. I am sure that if those Origin shares are placed, then they will be placed at a discount for the institutions that take those shares on. That is known.

But how big will that discount be? And will we 'small investors' see the share price slide back so that we can pick up CEN shares on market at a similar price to the big institutions? All that is unknown.

In the meantime, the opportunity that presented itself on the market today was too good to miss IMO.

SNOOPY

[Joshuatree]

Yes especially if the tiwai announcement is positive on monday; prudent.

[Xerof]

Origin must be really desparate to sell a controlling stake at a discount, but good luck to Infratil if they pull this one off. I'm hearing the midnight oil is burning brightly

[PSE]

Snoop CEN is cheaper than it has been for a long time so on that basis relatively more attractive.
I think a value investor would look at the earnings since listing and take a critical approach to future developments to have an idea of prospective earnings power. In particular should depreciation on hydro actually be reported as profit?
If the PE is 19 I find it hard to get excited, I would be looking for more along the lines of 4-7.

[PSE]

Reading through securities analysis at the moment trying to improve my game hope I don't sound too arrogant. Back when it was written everything was cheaper but a PE of 20 is used as the upper limit/danger zone.
Not one year's earnings but rather an average of historical earnings restated for skulduggery with some assurance the future is not poor/industry is not in decline but has some growth prospects.
Speculating on the Tiwai outcome is not the sort of thing I get into. The analysts are confident it will remain open so chances are a small profit to be made at risk of a loss.

[Snoopy]

Snoop CEN is cheaper than it has been for a long time so on that basis relatively more attractive.
I think a value investor would look at the earnings since listing and take a critical approach to future developments to have an idea of prospective earnings power.

PSE, my comparative table was not meant to be taken as representative of the total work I have put into researching Contact Energy! My study period was from 2008 to date. Why? Because this represents the post GFC era where we now find ourselves. Before that time general growth in the economy was consummate with aannual increses in power consumption. In NZ at least, that link is now broken and the demand for power in the forseeable future is more static.

My 'normalised' eps figures for other years 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

The new dividend policy is to pay out 100% of earnings as dividends. So my projected FY2015 earnings/dividend of 26.2cps, are well within the bounds of post GFC normal.

From an investment perspective, I now consider investing in energy companies in NZ from a 'steady state' perspective. If I can make the case for 'steady state' investment and the real result is some growth in the future (I am thinking perhaps a growth rate of half the GDP growth rate going forwards) then I will do better than I am predicting. A 'steady state' model, I see as slightly conservative which is where one 'safety factor' is built into this investment.

In particular should depreciation on hydro actually be reported as profit?

If you don't believe a hydro dam should be depreciated at all (I have some sympathy with that view), or maybe depreciated over 900 years, not 90, then Contact are currently understating their profits. This introduces another 'factor of safety' into my investment equation.

If the PE is 19 I find it hard to get excited, I would be looking for more along the lines of 4-7.

As you said PSE value is relative. The money that I am investing in Contact is currently earning 3% on call. So even though you might see CEN as 'expensive' in Ben Graham terms, I am still more than doubling my income on that capital. I would suggest that certain classes of assets (utilities) should be allowed to have higher PE ratios in an investment plan. That is because of the certainty of cashflows that many utility type investments have. Even so, I never meant to suggest that buying CEN at $4.90 was a get rich quick scheme!

SNOOPY

[Snoopy]

Reading through securities analysis at the moment trying to improve my game hope I don't sound too arrogant. Back when it was written everything was cheaper but a PE of 20 is used as the upper limit/danger zone.

I agree that IF deposit interest rates go back up to 5.5 to 6.0%, THEN this will reduce the relative attractiveness of utiliity type investments. It is a risk factor.

Not one year's earnings but rather an average of historical earnings restated for skulduggery with some assurance the future is not poor/industry is not in decline but has some growth prospects.

Ye. This is why I have read all of the annual reports from 2008 to date very carefully. I took out the 'skullduggery' by calculating each yaers annual profit myself. The method was:

1/ Take EBITDAF.
2/ Remove one off profit items.
3/ Remove Depreciation and Amortization
4/ Take off annual interest charge.
5/ Calculate tax payable at 28% (2008 30%)
6/ Calculate NPAT (normalised estimate).

Speculating on the Tiwai outcome is not the sort of thing I get into. The analysts are confident it will remain open so chances are a small profit to be made at risk of a loss.

My valuation assumes Tiwai remains open. I will be punished if I get this wrong. But the small value discount I will get if this uncertainty is removed will probably boost my returns a bit.

SNOOPY

[PSE]

I agree with 90% of what you say there Snoopy.
With respect to interest rates, if investors lower their required return due to low interest rates - isn't this just a wayof justifying the bubble and the bust?
I think yeah probably 90 years they are overstating depreciation and they shouldn't do it. It should be included in the PE as most investors aren't aware of the distinction.
If the PE is 15 it is more interesting and as you say stable.
There is not a right or wrong answer but your returns will be driven by the purchase price as you know. So the harder you are prepared to look the better the chances of finding a bargain.
Can't object too much about it I am just much more comfortable in the doom and gloom.

[PSE]

I am still not sure the right policy.
Presently I am leaning toward the idea of assuming a long term risk free return of 5%, regardless of present interest rate for the purpose of valuing a company.
Notwithstanding the open bank resolution making term deposits high risk.
In this case a PE of 20 for a stable company like a gentailer is fine, for the risk of loss in the business you are compensated with electricity prices which will rise with inflation even if the company doesn't invest and pays out it's profit.
Overall there aren't many investments at good prices and in this scenario there are worse places than having a little cash. The next crash will come sure as night follows day and when it does there will be hundreds of bargains.

[PSE]

I am still not sure the right policy.
Presently I am leaning toward the idea of assuming a long term risk free return of 5%, regardless of present interest rate for the purpose of valuing a company.
Notwithstanding the open bank resolution making term deposits high risk.
In this case a PE of 20 for a stable company like a gentailer is fine, for the risk of loss in the business you are compensated with electricity prices which will rise with inflation even if the company doesn't invest and pays out it's profit.
Overall there aren't many investments at good prices and in this scenario there are worse places than having a little cash. The next crash will come sure as night follows day and when it does there will be hundreds of bargains.