GNE - Genesis Energy

[Joshuatree]

BUY Genesis Energy
Genesis Energy - widely considered the “ugly duckling” of the power companies - may actually be the only one worth serious consideration as an investment.
The unsuccessful floats of Mighty River Power and Meridian Energy has led the government to seek a lower price - offering investors better value and a “more favourable experience” - on this smaller float.
Genesis Energy also has a less risky business structure, generating electricity from a mix of hydro, wind, gas and coal stations. The earlier floats were too dependent upon cheap hydroelectric stations but in a dry year would need to buy electricity on the wholesale market when prices were high to meet (fixed price) demand from their consumers - significantly depressing profitability. In this same situation, Genesis Energy should be able to meet all of its consumers needs by increasing gas and coal power generation - and selling some of that to the other companies at high wholesale prices. This is a more stable spread of assets that should produce more stable earnings and cashflows.
Genesis Energy also owns 31% of the Kupe joint venture which contributes about one-third of its earnings.
The NZ Government is seeking to sell 30-49% of Genesis Energy. That is 300-490 million shares at a price to be set between 135 and 165 cents per share, raising between $405-809 million. This is less than Mighty River ($1700 million) or Meridian Energy ($2000 million) and a last opportunity for a “successful” float (i.e. the last chance to under-price a relatively small float to give investors a favourable experience).
One company has valued Genesis Energy shares at 325-350 cents per share. That may be more than a little optimistic, but these shares do look under-valued at 135-165 cents.
Investors who buy in the IPO and hold for a year will also receive 1 bonus share for every 15 shares (up to a maximum of 2000 bonus shares), effectively lowering the issue price to 126½-155 cents.
Genesis Energy earned revenues of $2264.8 million in the year to June 2012, with a net profit of $86.4 million. Revenues fell 8.6% to $2070.2 million in 2013, but profits increased 20.9% to $104.5 million.
Revenues for the current year to June 2014 are forecast to decline 1.4% to $2040.6 million with net profits down 60.0% to $41.8 million (4.2 cents per share) and will pay an annual dividend rate of 12.8 cents (i.e. a 6.4 cents interim dividend already paid and a forecast final dividend of 6.4 cents).
In the year to June 2015, revenues are forecast to rise 6.1% to $2165.9 million and profits to recover 128% to $95.4 million (9.5 cents per share). An annual dividend rate of 16.0 cents is predicted.
Like the other power generators, Genesis Energy generates high cashflows, so will pay dividends that exceed its reported net profits. The 2014 dividend will distribute 84% of “free cash flows” (or 306% of net profits) and the 2015 dividend 85% of “free cash flows” (and 168% of profits).
With imputation tax credits that offers a current gross Dividend Yield of 10.8% (at an issue price of 165 cents) or 13.2% (at 135 cents). The 2015 forecast dividend offers a gross Dividend Yield of 13.5-16.5%.
So what are the downsides?
Firstly, this is a no-growth business. The company is able to pay high dividends as the electricity market is not expected to grow in the foreseeable future. So there is no current need to re-invest in new power stations. If that becomes necessary in the future, then the company would need to significantly reduce dividends and/or raise new equity and/or debt capital.
Secondly, Genesis Energy's 31% interest in the $1300 million Kupe joint venture is (like all oil and gas resources) a depleting asset. It currently provides strong cash flows (to pay dividends) but in 10-15 years these cashflows will decline sharply. Replacing that resource would require a very large capital investment in exploration and development.
Thirdly, like all power generators, the company owns and/or relies upon large infrastructure assets subject to “catastrophic events” (i.e. earthquake, volcanic eruption or other disasters). Damage to Kupe infrastructure or the Maui pipeline would disrupt gas supplies to its Huntly Power station and its ability to generate electricity.
Fourthly, there are political risks: Treaty of Waitangi claims could increase costs of water and geothermal resources, reducing operating margins. Claims could also require the return of land used in the business but “the compensation paid to the company may not be sufficient to cover the full extent of the losses incurred”. Government actions, such as a “carbon” tax could also lower operating margins. Higher transmission charges would transfer profits from the power generators to Transpower NZ (100% government owned).

Summary and Recommendation

Buy Genesis Energy shares!
At 135-165 cents, Genesis Energy shares do appear under-valued - offering a 2015 gross Dividend Yield of 13.5-16.5% - so we would expect to see the shares re-rated over the next few years. That will produce a high income yield andcapital appreciation for investors.
We do have concerns longer term. This is a no-growth business and, in fact, profits and dividends could drop in 10-15 years as the Kupe profits and cashflows run dry.

[bung5]

Oh you saying you can receive 2000 bonus shares?? I was thinking you only receive bonus shares on a maximum of 2000 held.

[macduffy]

Hi, Joshuatree.

Is that your analysis and recommendation of the Genesis float? Or whose?

Cheers

[Snow Leopard]

In addition to a fixed price, New Zealand retail investors will also receive one Loyalty Bonus Share for every 15 Shares purchased during the Share Offer, up to a maximum of 2,000 Loyalty Bonus Shares. These Loyalty Bonus Shares will be available to eligible New Zealand Applicants who hold their Shares in the same registered name for 12 months.

from the Letter from the Crown in the Investment Statement - in several other places as well.

Best Wishes
Paper Tiger

[Joshuatree]

Its a paid sub so I'm being discreet. Something like M***** A******* cheers JT

[macduffy]

Thanks, JT.

Here's another (broker's) view:

http://www.stuff.co.nz/business/indu...Genesis-Energy

[Beagle]

Watching this. I like the spread of generation assets and gross dividend and bonus share scheme is attractive notwithstanding the eventual run-down of Kupe's reserves. I like the fact that the price will be known before one is asked to invest, (finally they got this right).
Might have a modest crack at this to boost average portfolio dividend yield.

[couta1]

I've studied this one enough and with National looking sure to be returned and Kupe good for a long time yet im going for max allocation needed to obtain 2000 bonus shares so around 30k shares,Im picking around a 10% scaling being applied

[Harvey Specter]

I've studied this one enough and with National looking sure to be returned and Kupe good for a long time yet im going for max allocation needed to obtain 2000 bonus shares so around 30k shares,Im picking around a 10% scaling being applied

Applying through the public pool or the broker pool? I think last time, the broker pool has lower scaling?

I think I will throw in about $10k which is a fairly standard first investment for me.

[couta1]

Applying through the public pool or the broker pool? I think last time, the broker pool has lower scaling?

I think I will throw in about $10k which is a fairly standard first investment for me.

Broker pool,scaling the same for both technically but you get to ask for a firm allocation through the broker so yes probably more chance of getting what you ask for