Mercury's prediction that it could pay a full-year dividend of 20 cents per share in its 2022 financial year has surprised analysts who say they were expecting the company to take longer to pass on benefits from its acquisitions.
The power company reported earnings before interest tax, depreciation, amortisation and fair value adjustments (EBITDAF) down 6 per cent to $463 million for the year to June 30 compared to $490m in the previous financial year.
Net profit after tax was down $68m to $141m after it was hit by low rainfall into Lake Taupo and an unexpected outage at its Kawerau geothermal station in June.
But Mercury is forecasting EBITDAF for its 2022 financial year of $590m with increased earnings from its Turitea wind farm and the newly acquired Tilt Renewable assets and a dividend of 20cps - up from 17cps.
Grant Swanepoel, director, equity research at Jarden, said the 2022 outlook was broadly inline with its expectations although it did not include any benefit from the Trustpower retail business acquisition.
"What was a surprise was the 20c dividend guided for FY2022 - it was a very pleasant surprise.
"While the cashflow will be picking up quite considerably based on the acquisitions we were of the view they would probably bed those in first before they started lifting the dividend to this extent. We did expect the FY23 dividend to be lifted incrementally so coming a little bit earlier is a little reward for investors."
Swanepoel described the 2021 result as solid with a good outlook. He said the company faced a number of challenges ahead with around 60 projects on the go.
"They have got to deal with the Tilt acquisition, while that shouldn't be too difficult, it is 1100GWh of extra generation they have got to add into their portfolio. And then they have got to prepare for the Trustpower retail acquisition and how they are going to configure the two IT systems to manage two different retail platforms for a period."
But he had confidence in the company's management and board.
"They have got some good people on staff and it appears they have got one of the better boards in the market at the moment. I don't think they have taken on more risk than they can manage."
Craigs Investment Partners senior research analyst Cameron Parker also viewed the dividend guidance for FY2022 as a positive surprise.
"It is pleasing to see that dividend uplift, I know investors have been waiting on that."
Parker said in terms of the yield Mercury was probably the lowest yielding out of the gentailers and that was because investors had been acquiring the stock over the last 12 months and it had had a very good run.
"The share price is up and dividend yield is a bit lower. What investors are seeing there is that long-term fixed growth."
Vince Hawksworth, Mercury chief executive, described its 2021 result as a resilient financial performance in the face of some challenging market headwinds.
It is the second year in a row the company has been hit by low rainfall into Lake Taupo which saw its hydro generation fall to 3611GWh, well below the long-term average of around 4050GWh.
The unplanned outage at Kawerau hit the power station in June and saw its geothermal generation for the year decrease from 2615GWh during the previous financial year to 2594GWh.
The company said in a statement to the NZX that the financial impact of the loss in generation had been more acute than previous years due to historically high spot prices as a result of low hydro and gas availability.
Mercury's operational expenditure was largely flat for the eighth year in a row while its capital expenditure included $194m of growth investment.
Hawksworth said the company had made two ambitious acquisitions during the year which would give Mercury additional scale and capability.
"The acquisition of Tilt Renewables' New Zealand assets will increase Mercury's total annual generation by over 1100GWh. It has also secured several prospective development options."
Mercury also reached an agreement to buy the retail business of Trustpower. The acquisition is expected to be completed by June next year provided it meets various approvals.
"We see Mercury's and Trustpower's retail businesses as highly complementary, and this agreement would see the best of both being brought together for our customers."
Hawksworth said the combined businesses would have approximately 780,000 connections across both energy and telco services.
"Bringing together the retail businesses of Mercury and Trustpower will also give us the scale to make meaningful investment in the underlying IT systems, driving greater innovation for our customers. Deeper integration of the two businesses is not planned until the underlying IT systems will enable improved customer experience.
It is still in the process of constructing its Turitea wind farm but this was expected to be fully completed in the last quarter of 2021.
"These investments and our further pipeline of potential generation options are a clear demonstration of Mercury's commitment to decarbonising the electricity supply, and investing for the future," said Hawksworth.
Mercury chair Prue Flacks said more than $1.5 billion of investment had already been committed to for the construction of renewable infrastructure which meant the country was well placed to increase the proportion of renewable generation from around 80 per cent to over 90 per cent within five years.
"However, the current market conditions illustrate the challenge of ensuring the right balance is struck between investment in decarbonisation, security of supply, and ensuring energy is affordable."
Flacks said building one wind farm a year would be required to meet net-zero carbon emissions by 2050.
"Delivering that outcome, while maintaining security and affordability should be foremost in the Government's mind," she said.
Mercury will pay a dividend of 10.2 cents per share for the half taking total dividends for the financial year to 17cps - up from 15.8cps in the prior financial year.