A new era for power utilities? And sharemarket winners and losers in Q2 - Stock Takes

Tourism and campervan company Tourism Holdings was the worst-performing stock over the June quarter.

Has the Tiwai Point deal ushered in a new era for the big power utilities, a sector once considered to be at the duller end of the investment spectrum?

Now that the smelter’s owner, Rio Tinto, has finally settled on a 20-year power supply deal, a raft of projects are expected to follow, adding a new dynamic to an industry typically seen as staid.

Mohandeep Singh, senior research analyst at Craigs Investment Partners, said the market had for months been sitting back, waiting to see if Rio would stay or go.

“Setting a 20-year deal for something that consumes 12% of our electricity is big, because otherwise there were just so many resets that had to happen to account for that potential lack of the demand [if the smelter closed].

“Tiwai keeps the supply/demand balance tight,” Singh told Stock Takes.

Adding to the mix is New Zealand’s goal of achieving net zero for all greenhouse gas emissions, other than biogenic methane, by 2050.

“Those two things together mean that most of the sector has a green light to go ahead and develop new projects without any concerns that the gorilla in the room - Rio Tinto - is going to walk away,” Singh said.

“In terms of solar and wind, I think you will start to see that ramp up over the next four or five years, with the certainty of Tiwai Point.”

Power generation had gone from being a boring, “nothing-to-see here” sector to one that had quite a few moving parts in terms of who would develop what assets and where, and who would win and convert new customers to electricity.

Craigs, in a report, said the major listed electricity companies were well-positioned to support this increasing demand through the development of additional renewable generation.

New Zealand consumes around 40,000 Gigawatt hours (GWh) of electricity annually.

The number has stayed reasonably static over the past decade as population growth has been partly offset by more efficient products and appliances.

However, as 2050 looms, Craigs expects the electricity sector to play a key role in meeting the target, and that the listed electricity companies were well-placed to benefit.

Craig’s forecasts expect a total of 8000GWh of supply to enter the market by 2030, most of it coming from Mercury, Meridian, and Contact.

Total generation from the listed names is expected to increase from 38,000GWh in 2023 to 42,000GWh by 2030 (up 11%).

This is on the back of total capital expenditure of about $8 billion from 2024 to 2030.

“Based on our estimates, earnings growth will be dominated by the big three gentailers [Contact, Mercury and Meridian] through to 2030,” Craigs said.

Craigs said these companies had been holding back dividends over recent years to fund acquisitions and capital-intensive development programmes.

Genesis to outperform?

While most of the power companies’ shares rallied after the Tiwai announcement, Genesis was left behind, probably because of disappointing results from its KS-9 well in the Kupe field, yet brokers Forsyth Barr remain positive on the stock.

Genesis confirmed the expected 2025 earnings decline because of the failure of the KS-9 production well, and provided an indication of the impact on reserves.

“Whilst 2025 earnings are better than expected, reserves are going to be lower than previously forecast,” Forsyth Barr said.

“With these factors largely offsetting themselves, our target price and ‘outperform,’ rating are unchanged.

“With no more near-term downside risk associated with Kupe, Genesis is offering a strong yield and good value.”

CDC leaps

Another element in the power game will be the growth of energy-hungry data centres.

The Ministry of Business, Innovation and Employment (MBIE) expects to see an 81% increase in demand for electricity by 2050, as fossil fuel use switches to electricity, higher uptake of electric vehicles, and new demand such as large-scale data centres coming online.

An independent valuation of Infratil’s investment in data centre company CDC shows an increase of A$466m ($512m) over the three months since the March 31, 2024, valuation.

Infratil’s 48.25% investment in CDC is now valued at between A$4.16b to A$4.94b (with a midpoint of A$4.5b), up from A$3.78b to A$4.37b (with a midpoint of A$4.05b) at the end of March 2024.

The increase in valuation reflects the updated CDC pipeline disclosed at the announcement of Infratil’s June 2024 equity raising.

CDC is in advanced negotiations with customers for more than 400MW of capacity across multiple sites, expected to come online over the next four to five years.

As a result, CDC is developing a new Sydney data centre campus at Marsden Park, contributing to an increase in CDC’s future build capacity by 661MW to 1,197MW and total planned capacity of 1,887MW (up from 1,220MW in March 2024).

This expanded pipeline demonstrated the favourable market tailwinds for data centres and the strong progress in CDC’s customer discussions, Infratil said.

Aurora sale?

Dunedin City Council’s Aurora Energy may be up for sale.

Aurora is an electricity distribution business that owns and operates regulated electricity distribution networks in Dunedin, Central Otago - including Wānaka - and Queenstown Lakes.

The council is considering the possibility of approving the sale of Aurora Energy and using the proceeds to pay Aurora Energy’s debt, which is forecast to be $576 million by mid-2025.

Another proposal involves using the proceeds to establish a diversified investment fund to generate income for the council.

The fund would be worth many hundreds of millions of dollars and be professionally managed, the council says.

The capital in the fund would be protected and inflation-adjusted to protect its value over time, making it an intergenerational asset.

Aurora Energy has not paid a dividend since 2017.

Winners and losers

While the sharemarket has traded in a tight range over the last quarter, some individual stocks have fared well.

S&P/NZX50 gross Index constituent Fisher & Paykel Healthcare put on an 18.5% gain over the June quarter, followed by Gentrack (15.17%), Fonterra Shareholders Fund (13.9%), Vista Group (14%) and Westpac Banking Group (8.69%).

On the downside, the economic downturn is showing through in no uncertain terms with Tourism Holdings losing 43.7% over the quarter, KMD Brands (36.36%), The Warehouse (32.45%), Fletcher Building (31.3%) and Sky City (29.8%).

In the year to date, Gentrack came out tops with a 54.8% gain, while KMD was the biggest loser with a 53.3% decline.

Over June, the S&P/NZX 50 fell by 1.3%, bringing the benchmark index’s 12-month return to minus 1.7%.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.