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  1. #2031
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    http://nzx-prod-s7fsd7f98s.s3-websit...135/341087.pdf

    Only just got round to reading the SPH notice from Vanguard (above) which lists the "transactions and events giving rise to ceasing of substantial holding".

    It's from the period 12 Feb (last disclosure) to 23 Feb (this disclosure) and underlines the effect of the recent equity raise dilution:

    last disclosure
    total number held in class: 36,010,330
    total in class: 718,565,905
    total percentage held in class: 5.011%

    this disclosure (current holding after ceasing to have substantial holding)
    total number held in class: 37,063,798
    total in class: 764,994,476
    total percentage held in class: 4.845%

    So even though Vanguard (or, more accurately, Vanguard's clients) has been almost exclusively a buyer throughout the period, adding over a million shares in the space of a fortnight, it has been diluted out of it's 5% 'substantial shareholder' holding.

    Watch this space. Lots to happen over the next fortnight, with the effect of the Retail Offer's potential 2.5% discount rocking the SP next week, swiftly followed by CEN going ExD the week after, on 12 Mar.

    Ample opportunity to accumulate on the dips.

  2. #2032
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    Default Renewable Generation Portfolio: Tauhara Commissioned

    Quote Originally Posted by Snoopy View Post
    I want to wrap up this topic by focussing on what a pointy headed techno-splurge into the minutiae of power station operation at Contact has to do with investment returns for CEN shareholders. Fortunately, for those who are already lost, you don't need to know anything about the minutiae of operating geothermal power stations to appreciate this point.

    I have previously brought up the idea of 'thin air capital' increasing the value of certain power companies above what seems to be sensible when measured in PE or earnings yield terms. How effective 'thin air capital' is at raising the value of an investment depends on the value of the base (existing) assets it is bouncing off. If the value of the base generation assets is less (and that is what a power station operating at a lower capacity utilisation factor means), then it follows that the incremental effect of a fixed amount of 'thin air capital' is worth more (in relative terms, which is what matters in a comparison like this). It appears that for its geothermal assets at least, Contact Energy is operating those assets at a lower efficiency than that I have modelled. That means the 'thin air capital' appreciation factor will be greater than the one I calculated. And that means that the underlying fair value value of Contact shares will be slightly greater than the value which I calculated previously ($7.42).

    Redoing the calculation (for original, refer to my post 1883):

    0.94 x 226MW / (0.514x784MW + 0.84x452MW) = 0.271

    So my multiplication factor to allow for 'thin air capital' changes from 1.257 to 1.271

    My new Contact Energy 'fair value' share price valuation is now: $5.90 x 1.271 = $7.50 (up from $7.42 before)

    Not a huge difference. It doesn't change any of my conclusions from previous posts. But the extra 8cps is worth having nonetheless.
    Contact Energy Hydro Station Generation Capacity Notes Contact Energy Geothermal Station Generation Capacity Notes
    Clyde 464MW Commissioned FY1992 Ohaaki 48MW Commissioned FY1989
    Roxburgh 320MW Commissioned 1956 Te Huaka 28MW Commissioned FY2010
    Wairakei 145MW Commissioned 1958, Modified FY2005
    Poihipi 65MW Commissioned FY1997
    Te Mihi 166MW Commissioned FY2014
    Tauhara 152MW To be Commissioned FY2023
    Total 784MW Total 604MW
    Effective Capacity Factor 0.514 Effective Capacity Factor 0.840 (1)
    Total Operationally Adjusted 403MW Total Operationally Adjusted 507MW

    Notes

    (1) With a new geothermal station, I would expect somewhere near a 94% capacvity utilisation factor. However I have left my overall capacity utilisation factor at 84%, because I expect the capacity utilisation of some of the older geothermal plant to decline.

    -----------

    Prior to the go button being pushed on Tauhara, I had suggested that Contact had $623m of 'thin air equity capital' to build it.

    Debt can be borrowed against this 'thin air capital'. This means the total amount of investment capital (equity and debt) that can be utilised as a result of this 'thin air capital' was:

    $623m / 0.58 = $1,074m

    We now know the total estimated construction costs are $678m for a 152MW geothermal power station.. So this leaves:

    $1,074m - $678m = $396m available for other projects.

    This money could construct a new geothermal power station with a generation capacity of:

    396/678 x 152MW = 89MW

    This represents an incremental earning power on a Tauhara inclusive generation portfolio of:

    (89MW x 0.94) / ( 403MW + 507MW ) = 9.2%

    From this we can derive an incremental valuation factor of 1.092. This represents the value embedded in Contact Energy over and above fair value that is there to be accessed at any time to build new geothermal power generation assets.

    SNOOPY
    Last edited by Snoopy; 25-02-2021 at 02:51 PM.
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  3. #2033
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    Default FY2020 Fair value with 'thin air capital' potential included: Itr3 Pt2

    Quote Originally Posted by Snoopy View Post
    If we assume that a business cycle investment 'gross return' of 4.5% is required, then this equates to a CEN share price of:

    25.3c /0.045 = $5.62

    So $5.62 is therefore 'fair value'. However, this is fair value in the future, three years hence when Tauhara is up and operating. We need to discount this back using an appropriate 'time value of money' factor. This I calculated in post 1978 to be 0.8763.

    0.8763 x $5.62 = $4.92

    Readers should note that $4.92 represents 'business cycle neutral' fair value. We could argue that we are currently, keeping in mind the increasing ten year bond rate, descending from the top of a low interest rate inspired valuation cycle. My rule of thumb would suggest a 'top of cycle' value some 20% higher than my calculated fair value. However, given we may have passed the interest rate low, I am reducing my interest rate cycle premium from 20% down to 15%

    $4.92 x 1.15 = $5.66

    Contact Energy is trading at $6.77 as I write this post. This technique would suggest that Contact Energy is now still 17% overvalued (above fair valuation), but not out of line with the broad overvaluation of the NZX as a whole.

    But does a 'capitalised dividend valuation' give the full picture? This is a 'no growth valuation', so maybe not!
    Quote Originally Posted by Snoopy View Post
    We now know the total estimated construction costs are $678m for a 152MW geothermal power station.. So this leaves:

    $1,074m - $678m = $396m available for other projects.

    This money could construct a new geothermal power station with a generation capacity of:

    396/678 x 152MW = 89MW

    This represents an incremental earning power on a Tauhara inclusive generation portfolio of:

    (89MW x 0.94) / ( 403MW + 507MW ) = 9.2%

    From this we can derive an incremental valuation factor of 1.092. This represents the value embedded in Contact Energy over and above fair value that is there to be accessed at any time to build new geothermal power generation assets.
    We can now look beyond the Tauhara project and see how future growth, in the way of 'thin air capital', can be incorporated into my 'Capitalised Dividend' valuation.

    $5.66 x 1.092 = $6.18

    As I write this, Contact are trading at $6.93. If the share price purchase plan uses that as a base price, then I should be able to pick up shares at:

    0.975 x $6.93 = $6.76

    That value gap is closing and as the countdown to Tauhara begins my 'time value of money discount' will unwind giving the following 'fair value' price for CEN next year (ending 31st July 2021):

    $6.18 x 1.045 = $6.46

    And in two years time (actually 16 months from writing this post):

    $6.46 x 1.045 = $6.75

    The share price has come back a long way from the super heady prices of January. That is good for investors wanting to buy in. Yet even with a few healthy dividends thrown in on the way to 2023, my calculations are showing that CEN is not cheap, even at $6.76. So do I buy into this capital raise or not? Hmmm, decisions, decisions.

    SNOOPY
    Last edited by Snoopy; 26-02-2021 at 05:19 PM.
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  4. #2034
    Advanced Member Entrep's Avatar
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    Quote Originally Posted by HKG2301 View Post
    http://nzx-prod-s7fsd7f98s.s3-websit...135/341087.pdf

    Only just got round to reading the SPH notice from Vanguard (above) which lists the "transactions and events giving rise to ceasing of substantial holding".

    It's from the period 12 Feb (last disclosure) to 23 Feb (this disclosure) and underlines the effect of the recent equity raise dilution:

    last disclosure
    total number held in class: 36,010,330
    total in class: 718,565,905
    total percentage held in class: 5.011%

    this disclosure (current holding after ceasing to have substantial holding)
    total number held in class: 37,063,798
    total in class: 764,994,476
    total percentage held in class: 4.845%

    So even though Vanguard (or, more accurately, Vanguard's clients) has been almost exclusively a buyer throughout the period, adding over a million shares in the space of a fortnight, it has been diluted out of it's 5% 'substantial shareholder' holding.

    Watch this space. Lots to happen over the next fortnight, with the effect of the Retail Offer's potential 2.5% discount rocking the SP next week, swiftly followed by CEN going ExD the week after, on 12 Mar.

    Ample opportunity to accumulate on the dips.
    Good to know and makes sense, thanks

  5. #2035
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    Quote Originally Posted by winner69 View Post
    Contact need more capital

    What’s that all about

    http://nzx-prod-s7fsd7f98s.s3-websit...533/340251.pdf
    It is all about building Tauhara, a new flagship 'state of the art' geothermal power station that nevertheless plugs into the 'old' Wairakei field. But did they really need more capital? As a supporter of the 'thin air capital' theory, I would say 'no'. Contact themselves say in Slide 5 of the 'Capital Raising Presentation' the building of Tauhara is:

    "Supported by a $400m equity raise and a new distribution policy."

    That last underlined bit shouldn't be forgotten. 'Thin Air Capital' is, in essence, capitalising the improved earnings performance from long lived renewable energy generation assets. Capitalised earnings as an asset can be borrowed against. But debt ratings are more often measured against interest coverage ratios like EBITDA/I. So perhaps there is no need for Contact to capitalise this 'thin air capital' as rival gentailer Mercury Energy does?

    Actual improved earnings can either be paid out as higher dividends or kept within the company for internal company reinvestment. Contact's new dividend distribution policy is no longer to pay out 100% of operating cashflow. That means they are retaining cashflow that has come from the improved earnings of these long lived assets. To this extent they are counting on the benefits of 'thin air capital', even if they don't recognise the concomitant 'strengthened capital position' that results from any underlying 'permanent incremental increase in earnings'.

    This is the reason that I have removed the 'thin air capital' attributable to Tauhara from my valuation modelling of CEN (factor down from 1.271 to 1.092, see post 2032), even though Contact themselves have not banked it. For a power generating company, a generation asset is valued by discounting back the present value all future cashflows associated with that asset. So 'borrowing against assets' is really 'borrowing against future earnings' for a gentailer. I see borrowing against just one year's earnings (as limited by the snapshot 'EBITDA/I' borrowing covenant) as a similar borrowing process. Albeit one years earnings are a far more volatile borrowing stick manifestation of mean earnings for what is, in underlying terms, the same thing: borrowing against an asset. In this sense Contact Energy have recognised their 'thin air capital' on the income statement, if not on the balance sheet.

    Back to the original question: "Did Contact Energy need more capital?" My answer is no they needed , and have, more earnings to borrow against instead. Unless that is you see 'gentailer earnings' and 'gentailer capital' as alternative manifestations of the same thing. My discussion in the above paragraphs gives weight to that argument.

    SNOOPY
    Last edited by Snoopy; 26-02-2021 at 04:50 PM.
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  6. #2036
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    Quote Originally Posted by Ferg View Post
    I understand what you are saying 100% and that a return of capital via unimputed dividends is not income, and that then results in a real cash outflow for the shareholder. I agree a share buyback would make more sense. And in the absence of a share buyback, then debt reduction would also be beneficial. Unimputed dividends are not an efficient use of capital, nor are they tax efficient. There is no absolutely debate from me on that.

    However, I guess I was looking at it from the angle that if we are going to exclude the unimputed cash given to the shareholder, then the payment of tax from those same proceeds should also be excluded. Why? Assuming returning capital via unimputed dividends does not impact upon future profitability, P/E ratio or SP, then the overall personal and enterprise value should remain unaffected. The funding of tax payments on imputed dividends is independent of all of these factors. Therefore by excluding the unimputed dividend from the valuation, then the tax payment on the unimputed dividend should also be excluded. Yes unimputed dividends erode NTA but, in my opinion, NTA is the floor price for a share valuation and is not highly correlated to the share price or its movements for entities such as MEL. Such entities have a low ratio of capex to depreciation which generates FCF, and the non-retention of this cash erodes the NTA but not the share price or the shareholder wealth. Accordingly, the tax on the unimputed dividend should have no bearing on the overall share, or enterprise, valuation under this train of thought.

    Maybe others are not making the adjustments you are making to their calculations, hence they are comfortable with the SP being higher than your calculations. I'm merely exploring other avenues of thought, not saying any method is more or less accurate.
    This message from 1st September 2020 is still haunting me

    I like to think of my investments according to the Buffett model. A business has an intrinsic rate of return. on shareholder equity (ROE). The more equity the business has, the higher number you can use to multiply that intrinsic rate of return by. Consequently as shareholder equity goes up, profit goes up. However, I am realistic enough to admit that in the real world, with certain kinds of businesses in particular, like gentailers with long lived assets, these 'Buffett rules' are weakly correlated with what actually happens.

    Ferg said
    "Assuming returning capital via unimputed dividends does not impact upon future profitability, P/E ratio or SP, then the overall personal and enterprise value should remain unaffected."

    Now, I think I know what Ferg is getting at here. If Contact pays shareholders a large dividend, that doesn't mean the power stations will slow down until they recover their equity and then return to full generating capability again later. I am fairly sure the earnings capability of power stations has no connection to year to year fluctuations in shareholder capital. Take out a bit of share capital, imputed or unimputed, to pay a dividend and the company carries on operating as normal. In this sense, taking an unimputed dividend out of Contact or an imputed dividend out of a company will make no difference to operating performance. Both imputed and unimputed dividends make a positive difference to a shareholder's bank account. So what justification do I have for counting, in my modelling, an unimputed dividend as a 'negative event' for shareholders?

    Ferg said
    "overall personal and enterprise value should remain unaffected."

    Enterprise Value = Market Capitalisation +Total Debt−Cash on hand

    Clearly if a dividend is paid, then cash on hand is reduced. So paying a dividend must affect enterprise value, by definition. I feel like I am dancing on the head of a pin by pointing this out. But sometimes words do matter. Although I do note that Ferg said "personal and enterprise value" which maybe absolves him from the strict definition of 'Enterprise Value' that I rolled out above.

    It looks like the method I use, subtracting unimputed dividends directly from shareholder equity and not counting the unimputed dividend as a benefit, will in time reduce a gentailer shareholder's funds to zero. However, in practice, this will not happen. Because in tandem with this, I am using the concept of 'thin air capital' to recapitalise balance sheets to recognise the capitalised value of the increasing ability of long lived generation assets to earn more cash in the future as power prices rise.

    Right now I remain unconvinced there is a better way than mine to deal with what is a mismatch between accounting rules for depreciation and the cashflow in the form of dividends from those same assets being way more than is needed to cover the depreciation. Perhaps depreciation of long life power generation assets needs to be banned? That is what happened to rental houses depreciation claimed by landlords

    SNOOPY
    Last edited by Snoopy; 28-02-2021 at 08:31 AM.
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  7. #2037
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    Excuse my ignorance but what’s this ‘thin air capital’

    Something to do with crypto?
    “ At the top of every bubble, everyone is convinced it's not yet a bubble.”

  8. #2038
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    Quote Originally Posted by winner69 View Post
    Excuse my ignorance but what’s this ‘thin air capital’

    Something to do with crypto?
    It almost exists in the same alternate universe but not quite. Snoopy is referring to asset revaluations. The sum of a series of forecast future cash flows from an asset divided by periodic discount rates gives a net present value. NPV less book value gives the asset revaluation. Debit Asset, Credit Equity (which Snoopy refers to as capital). Given the increase in equity was made from thin air, snoopy refers to such revaluations as "thin air capital". Given the asset base has increased, it allows the generator to borrow against what Snoopy refers to as thin air capital, when the banks are looking at the future earning capacity. Same thing, different terminology.
    Last edited by Ferg; 27-02-2021 at 04:41 PM. Reason: added more

  9. #2039
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    Hi
    Where do I find my Entitlement number for the retail share offer please, I assumed it was on the email sent to me but I cant find it.


  10. #2040
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    It is on the email. If you look for a grey bar towards the end of the email, it is written on that.

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