Grant Bradley

Aviation, tourism and energy writer for the Business Herald

SOE Profile: Spotlight on power company sell-off

Mighty River Power has been valued at $3.4b to $3.8b. Photo / Supplied
Mighty River Power has been valued at $3.4b to $3.8b. Photo / Supplied

Global financial shocks at the time of any partial sale of state owned energy companies will increase their appeal, especially if there is downward pressure on the listing price, experts say.

Large utility companies are attractive defensive stocks in times of uncertainty but if market volatility continues throughout next year when the first could be listed, investors may pick up cheaper shares.

Utilities generally do not offer spectacular dividends but in the forecast low interest environment they would be attractive to cautious "mum and dad" investors and conservative investment funds.

A Crown Ownership Monitoring Unit review of all SOEs released late last year showed dividend yields have been highly variable and modest relative to major listed companies.

Fund managers and analysts said the fundamentals of the businesses tagged for partial sale - Mighty River Power, Meridian, Genesis and Solid Energy - were easy to understand, but the financial information required from SOEs was far less comprehensive than peers already listed and much more transparency was required.

While there is widespread market excitement about the plans, fund managers and analysts also warned investors needed to be mindful that if the newly listed companies pushed up power prices too quickly, that could result in regulation that would hit company profits and shareholder returns.

If National forms the next government it plans to sell up to 49 per cent of the now taxpayer-owned energy companies and sell more of Air New Zealand. The process could start later next year with Mighty River Power tipped as the most likely company to be partly sold, the others over three to five years.

A spokesman for Finance Minister Bill English said late last week the Government's focus was on presenting the broad policy to voters and he would not discuss any details.

But in response to public disquiet about asset sales, the Government has during its last term been at pains to stress it will retain majority ownership of the companies after the sales process expected to raise between $5 billion and $7 billion. Through as yet unexplained means it says it will ensure New Zealanders will be at the front of the queue for shares and has also floated the idea of a maximum cap of 10 per cent to ensure the widest possible spread of shareholders.

Ownership restrictions mean the Government may not raise top dollar for the assets.

Shane Solly, portfolio manager for New Zealand and Australian equities at Mint Asset Management, said much more detail was needed, but there was a strong demand among investors for well-run utility companies.

"You've got to look at a world that's pretty murky out there.

"Whether it's private individuals or local institutional investors or global institutional investors this is what people are looking for at the moment," he said.

The utility companies were relatively well run with certain earnings streams. New Zealand's economy was also relatively in better shape than many other countries and as a result getting attention from international investors, he said. Fisher Funds managing director Carmel Fisher said depending on the state of global markets, the timing could work well for investors.

"Obviously there are still a lot of details to come out and with any float it comes down to pricing - with global instability the price is going to be quite sharp which is a good thing for investors."

They needed to beware of the potential for regulation of power prices.

Any cap on price rises would affect firms' profitability if their costs increase.

Lines companies are subject to Commerce Commission regulations but so far power generators and retailers have escaped direct controls.

The price of shares will be set just as the shares come on to the market.

In what one analyst described "as much as an art as a science", the price is fixed after detailed company valuations are analysed and the level of demand from institutions is assessed.

- NZ Herald

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