The country's largest broker has valued Genesis Energy at the top end of its indicative price range but warned investors to be wary of its attractive dividend yield.
The public offer for shares in the electricity retailer is due to open on Saturday, with the Government expected to announce a final price for the shares on Friday night after a two-day book build process with institutional investors and brokers.
It is due to list on the stock exchange on April 17.
Research from broker Craigs Investment Partners has put the value of Genesis shares at $1.63 if it were trading today - at the top end of its $1.35 to $1.65 range. "If it were already listed, so priced relative to where the New Zealand electricity sector is currently trading, we believe that it would be trading near the top end of the range at $1.63."
The analysts said the view needed to be considered in light of its belief that the listed New Zealand sector was currently undervalued, that Genesis had been potentially undervalued by 10c a share due to modelling errors and that the valuation range does not give any value to the windfall potential in the event of a dry year.
The analysts said fuel management was key to Genesis' success. Genesis has the widest range of fuel supplies with access to gas and coal generation as well as hydro.
Craigs' analysts said Genesis contracts for gas and coal were on a take or pay basis and so they expected Genesis to run its gas baseload plant at high capacity to reduce its loss on its gas book.
"While this may at times appear to be suboptimal when viewed from an isolated electricity generation standpoint it is, in our view, optimal when the entire group's performance is considered."
They said Genesis was not well placed to face overcapacity in the market, which could happen if the Tiwai Pt aluminium smelter cuts back on its power usage, but most of the impact from poor historical contracting decisions was already built into its earnings.
The valuation range also did not take into account the upside Genesis would get from a dry year.
"While in an average hydro year Genesis carries the negative burden of its long gas position, in a materially dry hydro year ... it will be well positioned to make extraordinary profits."
But they warned investors to beware of Genesis' attractive headline yield. "On face value, Genesis offers a very attractive fully imputed FY15 dividend yield of 9.7 per cent at the top of the indicative range given a sector average FY15 net dividend yield of 7 per cent."
But "this is a dangerous comparison as a material part of Genesis' value stems from its investment in Kupe which is expected to cease to produce cash post FY26/27."
They said Genesis needed to return a materially higher level of cash relative to its valuation in order to compensate investors for the risk and timing associated with unlocking the value of Kupe before it runs dry.
• The Government plans to sell between 30 and 49 per cent.
• The price range is $1.35 to $1.65 per share.
• The prospective gross dividend yield is forecast to range from 13.5 per cent to 16.5 per cent.
• The offer opens to the public on March 29 with the share market listing due on April 17.