MCY Mercury NZ ( MRP Mighty River Power)

[Aaron]

Morningstar recommendation to sell as price seems very high to me as well.

What are other people's view. My strategy is to hold and not look at this as power companies are a license to print money, but traders obviously might have another view.

Maybe not the traders so much but long term investors what is everyone's view of selling when the price gets too high and waiting for it to fall back to a reasonable valuation especially with the possiblity of interest rate rises pushing asset prices down.

[tobo]

PEs are all over the place.
Based on the Morningstar valuation, MCY's PE 'should' be 40 instead of the the current 59.
Gentailers 311221.JPG

[Master98]

after bought tilt nz assets and tpw retailers business ( will be settled early this year), mcy is one of the best gentailers, another one is cen.

[Sideshow Bob]

Blah blah blah....

Results reflect significant change within half year - NZX, New Zealand’s Exchange

[Snoopy]

My take is that if not cancelled then no affect on the other shareholders as there is still the same number of shares on issue. I assume that they get the same dividend. Having them held as treasury stock enables them to be used for DRP's or performance issues without having to issue more shares.

Any affect would be minor as it is less than half a percent of the total shares on issue.

The comment above was made in relation to a share buyback in 2018. Perhaps they have now run out of shares to feed back into a DRP? That could explain the very strange announcement to the stock exchange today from Mercury.

https://www.nzx.com/announcements/389112

"Mercury announced on 22 February 2022 a Dividend Reinvestment Plan (‘DRP’) and its intention that for its FY2022 interim dividend the DRP is underwritten. This means that any shares not taken up by shareholders would be underwritten by an underwriter on the same terms."

"Mercury advises that it has entered into an underwriting agreement with Craigs Investment Partners Limited (‘CIP’) under which CIP has agreed to underwrite shares not taken up by shareholders in connection with the DRP for the FY2022 interim dividend at the price set under the DRP."

Do I read this correctly? I think it says that if I don't join the DRP, then Mercury will take the shares they would have offered to me and on sell those to someone else. Thus my MCY shares will forever be diluted? I see that total dividends paid over FY2021 added to $221m. So a half year dividend might be around $100m? Given the cost of building a new power station today, that seems quite a paltry sum of capital to raise. Or will this new DRP apply to all future dividends? Will the government take part in the DRP, or will their ownership stake in MCY end up being diluted? So many questions, so many unknowns....

SNOOPY

[limmy]

From their announcement:-

Mercury advises that it has entered into an underwriting agreement with Craigs Investment Partners Limited (‘CIP’) under which CIP has agreed to underwrite shares not taken up by shareholders in connection with the DRP for the FY2022 interim dividendat the price set under the DRP.

I may be wrong here but it sounds like Craigs will buy them and allocate to their bigger clients ?

[Snoopy]

From their announcement:-

Mercury advises that it has entered into an underwriting agreement with Craigs Investment Partners Limited (‘CIP’) under which CIP has agreed to underwrite shares not taken up by shareholders in connection with the DRP for the FY2022 interim dividendat the price set under the DRP.

I may be wrong here but it sounds like Craigs will buy them and allocate to their bigger clients ?

I must say, this is a strange transaction. I thought they were new shares at first, but actually they are treasury shares which, correct me if I am wrong, means that these 'shares to be disbursed' are MCY shares that the company has previously bought back on market. This means there has been a 'reverse buyback' effect on the share price. The result of a buyback is that the share price goes up due to a change in the supply demand imbalance (even though some companies are at great pains to point out they can only buy a certain percentage of shares traded every day so this doesn't happen - yeah right!). The result of a sell down has the opposite effect: Shares sinking towards the low of their trading range.

I am unclear as to why Mercury would offer up treasury shares like this. Normally treasury shares are there to be used as incentives for executives, and these treasury shares would have been bought for that purpose (we can tell that because the shares were not cancelled when bought). I can only conclude that Mercury does not intend to use share based incentives for their executive team going forwards.

SNOOPY

[Snoopy]

Financial Year	Normalised 'eps'	Net Dividend Paid (per share)	Gross Dividend Paid (per share)
2016	10.3c	8.4c + 2.5c(S) + 5.7c	11.67c + 3.47c + 7.92c = 23.06c
2017	12.1c	8.6c + 2.88c(NI,S) + 5.8c	11.94c + 4.0c + 8.06c = 24.00c
2018	14.0c	8.8c + 5.0c(S) + 6.0c	12.22c + 6.94c +8.33c = 27.49c
2019	11.7c	9.1c + 6.2c	12.64c + 8.61c = 21.25c
2020	11.7c	9.3c + 6.4c	12.92c + 8.89c = 21.81c
2021	?c	9.4c + ?c	13.06c + ?c = ?c
Total FY2016 to FY2020	59.8c	84.68c	117.61c

Notes:

1/ The above 'per share' table is based on the 1,400m MCY shares on issue.
2/ (NI) means 'Not Imputed', (S) means 'Special Dividend'.

In a change of policy I have decided to work with all dividends. Despite special dividends not being repeatable, they are paid frequently. And, using this particular valuation method, I have not recognised these special dividends as a benefit for shareholders in any other way.

From the table, the average annual normalised gross dividend payment over the last five years has been:

(23.06c+24.00c+27.49c+21.25c+21.81c)/5 = 23.52c

Nevertheless time has moved on and I have decided to include the first dividend for FY2021 (13.06c gross) -that has already been paid- and remove the equivalent dividend from five years previously (11.67c + 3.47c gross).

(7.92c+(24.00c+27.49c+21.25c+21.81c)+13.06c)/5 = 23.11c

Financial Year	Normalised 'eps'	Net Dividend Paid (per share)	Gross Dividend Paid (per share)
2016	10.3c	8.4c + 2.5c(S) + 5.7c	11.67c + 3.47c + 7.92c = 23.06c
2017	12.1c	8.6c + 2.88c(NI,S) + 5.8c	11.94c + 4.0c + 8.06c = 24.00c
2018	14.0c	8.8c + 5.0c(S) + 6.0c	12.22c + 6.94c +8.33c = 27.49c
2019	11.7c	9.1c + 6.2c	12.64c + 8.61c = 21.25c
2020	11.6c	9.3c + 6.4c	12.92c + 8.89c = 21.81c
2021	10.1c	9.4c + 6.8c	13.06c + 9.44c = 22.50c
2022	11.6c	10.2c + 8.0c	14.17c + 11.11c = 25.28c

Notes:

1/ The above 'per share' table is based on the 1,400m MCY shares on issue.
2/ (NI) means 'Not Imputed', (S) means 'Special Dividend'.
3/ 'Normalised eps' = 0.72x(EBITDAF-DA-I) / 1,400 shares on issue

For this valuation technique, I work with all dividends. Despite special dividends not being repeatable, they are paid frequently. And, using this particular valuation method, I have not recognised these special dividends as a benefit for shareholders in any other way.

FY2021

From the table, the average annual normalised gross dividend payment over FY2017 to FY2021 inclusive has been:

(24.00c+27.49c+21.25c+21.81c+22.50)/5 = 23.41c

FY2022

From the table, the average annual normalised gross dividend payment over FY2018 to FY2022 inclusive has been:

(27.49c+21.25c+21.81c+22.50+25.28)/5 = 23.67c

SNOOPY

[Snoopy]

The following is a break down of the equity ratio of what was once 'Mighty River Power' and is now 'Mercury Energy' since float time.

	Equity (A)	Assets (B)	Equity Ratio (A)/(B)
FY2013	$3,182m	$5,802m	0.5484
FY2014	$3,219m	$5,689m	0.5658
FY2015	$3,337m	$6,058m	0.5508
FY2016	$3,315m	$6,085m	0.5448
FY2017	$3,308m	$5,997m	0.5516
FY2018	$3,286m	$6,091m	0.5395
FY2019	$3,537m	$6,484m	0.5455
FY2020	$3,739m	$6,885m	0.5431
FY2021	$4,186m	$7,978m	0.5247
HY2022	$4,605m	$8,497m	0.5419

Notes

1/ The Tilt renewables NZ assets acquisition was not finalised until August 2021. I have included the HY2022 equity ratio so shareholders can get a feel for how the balance sheet looks following this transaction.

SNOOPY

[Snoopy]

Time to update my table

	Reval. Hydro & Thermal Assets ($m)	Reval. Geothermal & Other Generation Assets ($m)	Total Revaluation ($m)	Post tax New Capital Per Share ($m)	Pre Tax Revaluation ($m)	Pre Tax New Capital Per Share (c)
2009	0	170.987	170.987	12.2	244	17.4
2010	200.900	60.250	261.150	18.7	373	26.6
2011	153.300	135.275	288.575	20.6	412	29.4
2012	119.520	2.880	122.240	8.7	170	12.1
2013	30.960	26	57	4.9	79	5.6
2014	4	25	29	2.1	40	2.9
2015	356	0	356	25.4	497	35.5
2016	?	?	99	7.1	137	9.9
2017	0	38	38	2.7	52	3.7
2018	0	40	40	2.9	55	3.9
2019	109	71	180	12.9	250	17.9
2020	182	31	213	15.2	296	21.1
2021	396	279	675	48.2	938	67.0
Total			2,530	181.6		253
less Special Dividends Declared (FY2015-FY2018) (per share)			-229	-15.4
add Snowtown Windfarm dividend (FY2021)			55	3.9
add Hudson Geothermal sale Profit (FY2021)			41	2.9
add Tilt Stake Gain (FY2022)			404	28.9
equals Residual Thin Air capital				201.9

Notes:

1/ Capital per share figures assume 1,400m shares on issue throughout the whole comparative period.
2/ 30% tax rate assumed up until FY2012. 28% tax rate assumed from FY2012 forwards.
3/ I notice that after FY2014 the break down in the annual report between 'Hydro & Thermal Assets' and 'Other Generation Assets' has ceased in the 'Property Plant & Equipment table. This detail was reinstated in FY2017, if you looked at 'Assets at Fair Value' sub note under the subsequent annual report notes on 'Property Plant & Equipment'.
4/ Since I am counting 'thin air capital' as an extra return over and above dividends, I feel it is appropriate to look at the 'post tax' effect of the new thin air capital. That aligns more closely with the post tax effect of dividends. Dividends 'post tax' are what shareholders get in their bank account.
5/ I have removed the special dividends declared over time from my analysis, as these may been seen as a method of balance sheet optimization by paying back excess 'thin air capital' (ref post 1440).
6/ For the calculation of the 15.4cps special dividends paid, see my post 1318 on this thread.
7i/ Mercury acquired 19.9% stake in Tilt Renewables acquired for $144m in FY2018. This had a market value of $130m at EOFY2018.
7ii/ During FY2019 Mercury subscribed $55m to a 'Tilt Renewables' capital raising. The book value of Mercury's share of Tilt increased to $249m over FY2019.
7iii/ During FY2020 Mercury acquired a seat on the Tilt board. This meant that Mercury could exert 'significant influence' over Tilt. Consequently accounting rules forced the Tilt stake to be reclassified in the balance sheet as an 'associate' rather than an 'investment'. The Tilt 'associate shareholding' was valued at $230m on the books at EOFY2019.
7iv/ Mercury subsequently sold their 19.9% stake in Tilt for $608m
7v/ The Tilt sale price was adjusted down to account for a $5m pre-sale dividend already booked.
7vi/ The 'thin air' capital gain on this series of transactions was therefore:
$608m - $5m - $55m - $144m = $404m

This $404m figure is at variance with the profit figure of $376m in AR2021 p63, because I am basing my profit calculation on original cost, not book value at the time of sale.
7vii/ Final agreement on the Tilt stake sale was made 21st June 2021. This is why I am including the Tilt sale capital profit in this FY2021 analysis, even though teh actual money would not be received until August 2021.

---------


201.9cps x 1,400m shares = $2,827m of retained 'hidden value' 'Thin air capital' over the years.

Of course not all of this still exists because it has been used to build both the Nga Awa Purua (FY2010) and Ngatimariki (FY2013) power stations over the years, the Turitea wind farm, and the acquisition of the NZ wind farm assets of 'Tilt Renewables'. These constructions and acquisitions were built using a combination of new equity (the infamous 'thin air capital') and borrowings. We should also bear in mind that some of this thin air capital may be needed to retain the credit rating of the company. Put simply, the more capital the company have, the less borrowings they need. So some unspent thin air capital could contribute to a better credit rating for the company.

Notwithstanding the large amount of thin air capital created since 2008, 2021 foresaw the biggest spend ups so far, signing up to buy the biggest NZ windfarm assets back off Tilt's new owner, and also signing up to buy the retail assets of Trustpower. (The transaction went through on 3rd August 2021, which was in FY2022, although commentators were aware of the details in FY2021 - refer AR2021 Note 19 'Subsequent Events).
.
And how much did shareholders have to stump up to make these acquisitions? Nothing. And how much was the debt ratio of the company increased so that borrowings could pay for these acquisitions? Not at all.

There is the power of 'thin air capital' for you.

SNOOPY