Meridian shares worth $1.70-$1.86 - analyst

Meridian's Te Apiti Wind Farm on the Ruahine Ranges between Woodville and Ashurst. Research company Edison says Meridian share are worth between $1.70 and $1.86 each. Photo / NZ Herald

Edison, an independent research company, has valued shares in state-owned Meridian Energy at $1.70 to $1.86 each.

The valuation by Edison, which is not connected with this month's float for the power generator and retailer, compares with the government's valuation of $1.50 to $1.80 for institutional investors.

See its report here.

Edison said Meridian was being priced with an attractive initial dividend yield and a semi-deferred payment structure that sees retail investors pay $1.00 per instalment receipt now and no more than $0.60 in May 2015.

It said Meridian had the capacity to pay out "significantly more than net earnings" each year in dividends for the foreseeable future.

Analysts have said Meridian, which accounts for 30 per cent of New Zealand's electricity output, would be susceptible if the Labour/Greens plan to take control of the electricity market.

As the company generates its power entirely from renewable sources, it was also vulnerable to the weather. There was also some risk attached to the possibility that its biggest customer, the Tiwai Point aluminium smelter, would shut down.

"Downside risks relate primarily to the Labour-Green NZ Power proposal, which we believe has a low chance of implementation," Edison said.

"While we think in the long term Meridian could be at least neutral to Tiwai Point closing - after an initial adjustment period - a more likely scenario is a reduction in contracted volumes from 2017, which could work to Meridian's shorter-term advantage," Edison said.

Part of Tiwai's load is up for renegoiation in that year, opening the possibility of Meridian achieving higher price for at least part of its supply to the smelter.

Earlier this week, independent research house Morningstar has come out in favour of the upcoming Meridian Energy float, saying it is likely to appeal to long-term investors seeking yield.

Independent valuations from Morningstar ($1.75), Wellington-based investment bank Woodward Partners ($1.81) and TDB Advisory ($1.70) were all at the top end of the Government's final price range of $1.50 to $1.80.

Brokers First NZ Capital, which is also not involved in the partial privatisation process, was more conservative. Applying Contact Energy and Mighty River multiples would indicate a fully paid trading range for Meridian shares of between $1.43 and $1.60, with a $1.51 midpoint, First NZ said.

For institutional investors, the final instalment will be between 50c to 80c, based on the offer price of $1.50 to $1.80. The final price will be determined by a book-building process from October 21 to 23.

https://www.nzx.com/meridian-research