Money Editor for NZ Herald

Stock Takes: Mighty mess

Photo / Sarah Ivey
Photo / Sarah Ivey

Mighty mess

The political machinations around the electricity sector have definitely added an element of higher risk to the Mighty River Power float making it even harder for retail investors to make a call on buying into the soon-to-be-listed power company.

Brokers and fund managers not directly involved in the deal have discounted their valuations by between 10 and 25 per cent putting it at the bottom end and, in some cases, outside of the Government's $2.35-$2.80 price range.

Morningstar's Nachi Moghe says he would value MRP at $2 - down from $2.70 - if the Labour/Greens proposal came to be.

Wellington firm Woodward Partners has dropped its range by 10 per cent to $2.12-$2.52 and Wanaka-based Logic Fund Management has a target valuation of $1.90 to $2.20, down from its pre-announcement valuation range of $2.35 to $2.55.

However, it's interesting to note that Logic says if the final price for MRP shares is at the lower end of the range then it could be a good buy, particularly if National wins the next election in 18 months time as it could result in "significant upside".

The problem is retail investors won't know what the final price is until after they have already committed to buying shares as the retail offer period closes on May 3 and the price won't be set until May 8.

The investment bankers want retail shareholders to trust in the market and the big institutions to get the price right but it's hard when the process isn't transparent to those not directly involved.

Will it happen?

Big brokers Forsyth Barr and First NZ aren't allowed to publicly put a price on MRP because they are involved in the deal but have speculated on the odds of the single market model actually happening and its impact on the already listed Contact Energy and TrustPower.

Both brokers rate Labour's chances of winning the 2014 general election at 50/50 based on recent polls.

Forsyth Barr reckons that if Labour does win there is a 67 per cent chance of the policy being implemented giving an overall probability of 33 per cent.

First NZ rates the chances of implementation as higher at 70 per cent, stating that if a Labour/Greens government is elected "what they will want, they will likely get" regardless of whether it "makes sense" to do so or "will work".

First NZ is of the view that a 10 per cent reduction in power prices could be achieved without changing the current model and that in "real terms" (after line charges and inflation is taken into account) the price of power will begin to reduce in the next few years anyway.

Buy or sell?

But Forbar and First NZ's opinions differ when it comes to the impact on Contact and TrustPower.

Forsyth Barr has lowered its target price for Contact by 10c per share to $6 but maintained its buy recommendation while it has dropped the target price for TrustPower by 40c per share to $8.35 and upgraded its recommendation from accumulate to buy.

"Notwithstanding the risks surrounding the implementation of a single buyer model, we believe both Contact and TrustPower offer investors a solid dividend stream that is not going to be affected for at least five years," Forsyth Barr states as its investment view.

First NZ has also lowered its target price for Contact, from $6.20 to $5.70, but is lowering its recommendation from outperform to neutral on share price appreciation.

However, the discount is less than it was factoring in for the potential closure of the Tiwai Pt aluminium smelter for which it put Contact's price at $5.50 and it doesn't believe a double discount is warranted.

"If this [the Labour/Greens] policy goes ahead and Rio shuts down the Tiwai smelter then generators would likely be protected from the negative impact of such a scenario."

For TrustPower First NZ has cut its valuation from $8.10 to $7.65 but raised its rating from underperform to neutral.

Contact Energy last traded at $5.38 while TrustPower traded at $7.21.

Winners and losers

The view that appears to be emerging is that institutional investors will be the winners in this situation as they will be able to demand a lower price for an asset which they believed was worth a lot more a week ago.

If National stays in power at the next election Mighty River Power investors will potentially be getting themselves a good deal.

The downside is that Treasury and ultimately the taxpayer will be the loser as the asset won't be realised for as much as they would like and the regulatory uncertainty is also likely to impact on the prices Treasury are able to command for Meridian and Genesis as well.

The capital markets are also potentially the loser as the situation is likely to drive new investors away because the decision will appear too hard.

It could also mean that fear of high regulation could turn off international investors.

- NZ Herald

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Money Editor for NZ Herald

Tamsyn Parker is the NZ Herald's Money Editor. A business journalist for ten years, she has worked in the UK and NZ for the New Zealand Herald, the National Business Review and a specialist publication on investment products for financial advisors. She is passionate about helping readers learn more about to make their money work for them.

Read more by Tamsyn Parker

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