Research firm Morningstar is valuing Mighty River Power at $2.70 per share but says if the Labour/Green proposal to revamp the electricity sector were to go ahead it could knock the price down to under $2.
Morningstar analyst Nachiket Moghe released a note this morning recommending investors subscribe to the offer.
Moghe is one of few analysts not captured by a blackout preventing those directly involved in the deal from making a recommendation on the stock until 40 days after its shares are alloted.
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Moghe said his high valuation, which is at the top end of the $2.35 to $2.80 range predicted in the investment prospectus, was based on Mighty River Power's strong competitive position.
"We expect Mighty River to generate return on invested capital of 12.5 per cent on average over the next five years..."
Moghe said strong free cash flows due to a declining capital expenditure program should result in higher distributions to shareholders and he projected dividends to rise by 11.5 per cent per annum on average between 2013 and 2017.
But he warned regulatory change would be the main impediment to the company generating strong returns.
"We believe the opposition proposal is fairly extreme, but it would significantly reduce our fair value estimate if implemented."
Moghe said the proposal had the potential to reduce Mighty River's operating income by $100 million and erode the value of the shares by 60c to 80c per share potentially pushing it below $2 per share.
Moghe said he had a high uncertainty rating on the stock because of the regulatory uncertainty.
While a general election is still 18 months away and the revamp of the sector could take a further four years after that Moghe said potential investors should consider the risk now.
"They should consider those risks before investing in the shares. It's not just the fair value, you've got to look at all the risks as well."
Moghe said despite his high valuation he would not be surprised if the shares ended up being valued at the low end of the range or even below the low end.
"It's most likely to be closer to the lower end," he said.