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Home / Business / Companies / Energy

Why Contact Energy is suddenly flavour of the month

Jamie Gray
By Jamie Gray
Business Reporter·NZ Herald·
9 Oct, 2020 05:05 AM3 mins to read

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Contact's share price has rallied sharply. Photo / File
Contact's share price has rallied sharply. Photo / File

Contact's share price has rallied sharply. Photo / File

Shares in Contact Energy have been rallying strongly on speculation that the power generator and retailer may soon be included in the New Zealand MSCI index.

In the bigger picture, power companies in general have enjoyed a return to favour based on optimism that the Tiwai Point aluminium smelter may remain open beyond its expected August 31, 2021, closure date.

Contact Energy shares last traded at $7.93, up 38c or 5 per cent from Thursday's close, and up from $6.65 at the end of September.

Harbour Asset Management senior portfolio manager Shane Solly said the market was pricing in a chance of Contact entering the index, which would potentially see a spike up in trading volumes.

Forsyth Barr, in an analysis, said Contact Energy had a good chance of entering the MSCI NZ index at the November reset.

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"This is likely to provide a strong share price tailwind," the brokerage said.

As it stands, there are only seven companies on the MSCI index, which passive, index-based funds use as a key reference point.

For an eighth company to enter it needs to have a market capitalisation of 0.5 times the Global Minimum Size Reference (GMSR) on the pricing day, Forsyth Barr said.

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The GMSR benchmark that Contact has to beat is linked to global share prices and the New Zealand dollar.

Te Mihi, contact Energy's newest geothermal power station in Wairakei. Photo / Supplied
Te Mihi, contact Energy's newest geothermal power station in Wairakei. Photo / Supplied

The pricing day can be any business day of the10 business dates between October 19 and October 30.

The result will be announced on November 11, with re-balancing occurring on November 30.

Fellow generators Mercury and Meridian both entered the index in November 2014, and had strong performances after their inclusions as a result of passive fund demand.

Mercury exited the index from May 2018 to November 2019, and had another boost on its re-entry.

Contact was close to MSCI inclusion at the November 2019 index assessment and looked likely to enter at that time.

In the lead-up to that rebalancing Contact's share price hit $9.00/share - a decade high.

"However, the announcement from Rio Tinto that it was conducting a strategic review of NZ Aluminium Smelters (NZAS) came during the 10 day pricing period, causing Contact to miss out," Forsyth Barr said.

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"Somewhat ironically, it is the improving prospects of NZAS remaining open that provided Contact's initial share price boost that now sees it poised to re-enter the MSCI NZ Index," it said.

Power companies in general have enjoyed a return to favour as investors were prepared to look past the uncertainty surrounding Tiwai.

Jarden director of equity research Grant Swanepoel said electricity futures market pricing out to 2024 suggested the smelter would stays open until then.

Likewise the sharemarket pricing of the power generators suggested there was confidence surrounding phased closure of Tiwai, as opposed to a complete shutdown next August, was on the cards.

"That being said, there is an awful lot of water to flow under bridge on the possibility of Tiwai staying open," he said.

Increasingly positive signals throughout September that the smelter would stay open resulted in a strong month for the sector, with all of the electricity stocks outperforming the S&P NZX50 Index.

The Labour Party has put forward a proposal to extend the life of the smelter by three to five years, while an economic transition for Southland is developed.

There is also a renewed sense of optimism that the key sticking point for Rio Tinto — electricity transmission charges — could be resolved.

Shares in Tiwai's main supplier, Meridian, last traded at $5.41, down 8.5c, after having rallied very strongly over the last fortnight.

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