NEW ZEALAND GNE NZ Price (at 06:49, 29 Jul 2015 GMT) Underperform NZ$1.71 Valuation NZ$ 1.60 - DCF (WACC 8.0%, beta 0.6, ERP 7.0%, RFR 3.5%, TGR 2.1%) 12-month target NZ$ 1.65 12-month TSR % +6.1 Volatility Index Low GICS sector Utilities Market cap NZ$m 1,710 30-day avg turnover NZ$m 1.9 Number shares on issue m 1,000 Investment fundamentals Year end 30 Jun 2014A 2015E 2016E 2017E Revenue m 2,005.0 2,097.1 2,071.9 2,067.8 EBIT m 167.6 193.5 200.8 200.2 Reported profit m 49.2 112.3 95.2 95.7 Adjusted profit m 69.2 80.1 95.2 95.7 Gross cashflow m 225.9 229.1 236.5 230.1 CFPS 22.6 22.9 23.7 23.0 CFPS growth % nmf 1.4 3.3-2.7 PGCFPS x 7.6 7.5 7.2 7.4 PGCFPS rel x 0.67 0.71 0.75 0.82 EPS adj 6.9 8.0 9.5 9.6 EPS adj growth % nmf 15.7 18.9 0.6 PER adj x 24.7 21.4 18.0 17.9 PER rel x 1.18 1.07 1.00 1.06 Total DPS 13.0 16.0 16.4 16.9 Total div yield % 7.6 9.4 9.6 9.9 Franking 1 % 100 100 100 100 ROA % 4.6 5.4 5.7 5.9 ROE % 3.7 4.3 5.3 5.5 EV/EBITDA x 8.2 7.8 7.8 8.0 Net debt/equity % 51.4 51.3 51.4 52.4 P/BV x 0.9 0.9 1.0 1.0 1 NZ imputation credits are only able to be used by shareholders to offset NZ income tax liability. GNE NZ vs NZSE50, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, July 2015 (all figures in NZD unless noted) 29 July 2015 Macquarie Securities (NZ) Limited A 9% FCF yield and you call underperform? Event (GNE) Q4 op stats look consistent with its FY15 EBITDAF guidance of $330-345m (with topside bias). Macq $342m, cons $341m. Impact GNE's electricity customers stood at 516.6k at June 30 - a small increase over the quarter but therefore a stabilisation of a fairly rocky boat (-3.1% decline pcp at end of March quarter). It seems to have done this whilst not sacrificing too much on mass market electricity price but maybe a bit more on gas (newly included data from this quarter). Mass market electricity pricing (inc. lines but ex PPD and presumably retention payments) was surprisingly stable over the quarter (+3% but flat ex lines versus -2% 2H15 Macq). Mass market gas pricing was down 6% pcp over Q415 versus -4% pcp FY15 - broadly in line with the total Gas/LPG gross margin decline we have factored in for 2H15. This stabilisation in customer numbers has occurred outside of the wonderful capped/all-you-can-eat retail gas promotion launched recently (dual fuel gas customers are ~15% of GNE s electricity custs and actually fell over Q4). We think Kupe s FY15 EBITDAF looks set to print at around $93m. The key question from here is when the joint venture partners will release its reserve re-determination and associated capex decisions. For GNE, these outcomes are likely to have implications for dividend policy given ~35% of FY15 FCF is derived from Kupe and field production will begin to decay meaningfully in around 3 years. The guided FY15 dividend (underpinned by a progressive real dividend policy) of $0.16ps now represents 85% of FCF or 91% at spot WTI oil of US$48/bbl and NZD/USD at 0.67 (FY15 56% production hedged at US$99.50/bbl, 0.78 NZD/USD as per PFI) and adjusting for below mean hydrology for the year. As an aside, we notice that the proportion of 'vacant' gas electricity ICPs (only Nth Isl has retic. gas) for GNE has climbed from 1.8% a year ago to 2.6% at end of June. We wonder what lies behind this 44% increase in dormant gas meters over the year (our understanding of what 'vacant' status means) and will duly report our learnings to you. We think the Auckland 'ghost town' stories in the press sounded implausible but this may be fresh grist to the mill. Earnings and target price revision No change. Price catalyst 12-month price target: NZ$1.65 based on a DCF methodology. Catalyst: 25 Aug FY15 result, Qtly op stats, 3 Aug Tiwai option. Action and recommendation The stock trades on a FY16 FCF yield of 9.0% (ex Kupe); the catch is that its dividend rests heavily on depleting and hedged oil revenues and, as such, does not look sustainable to us. GNE may become more interesting once a decision has been reached on Kupe s reserves/capex and the distribution policy has been revisited. Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Fig 1 Summary financials (GNE:$1.71) Interim Results 2H/14A 1H/15A 2H/15E 1H/16E Profit & Loss 2014A 2015E 2016E 2017E June y/e June y/e Operating Revenue $m 1,032 1,068 1,029 1,061 Operating Revenue $m 2,005 2,097 2,072 2,068 EBITDAF $m 157 173 170 173 EBITDAF $m 308 342 342 335 Depreciation and amortisation $m 49 50 49 49 Depreciation and amortisation $m 100 99 97 95 Depreciation and depletion - oil and gas $m 26 26 24 23 Depreciation and depletion - oil and gas $m 56 50 44 39 EBIT - pre non-recurring $m 77 97 96 102 EBIT - pre non-recurring $m 168 193 201 200 Total EBIT $m 77 129 96 102 Total EBIT $m 140 226 201 200 Net Interest Income $m 34 34 35 35 Net Interest Income $m 68 69 69 67 Pre-Taxation Profit $m 43 95 61 67 Pre-Taxation Profit $m 72 157 132 133 Taxation expense/(credit) $m 13 27 17 19 Taxation expense/(credit) $m 22 44 37 37 Profit after taxation $m 30 68 44 48 Profit after taxation $m 49 112 95 96 Minority Interests $m 0 0 0 0 Minority Interests $m 0 0 0 0 Reported Profit after taxation $m 30 68 44 48 Reported Profit after taxation $m 49 112 95 96 After-tax Non-Recurring $m 0 32 0 0 After-tax Non-Recurring $m -20 32 0 0 Underlying NPAT $m 30 36 44 48 Underlying NPAT $m 69 80 95 96 Summary assumptions 2014A 2015E 2016E 2017E PV (FY15-20) $m 1271 GWAP $/MWh 71 72 72 75 PV of perpetuity $m 526 LWAP:GWAP / 0.98 1.01 0.98 1.00 PV FCF Available to Ow ners $m 1797 Average retail sales price (ex T/D) % pa 1.8-0.0-0.2 1.3 BV Kupe interest $m 271 Sw aption fees $m 32 21 21 23 Less Net Debt $m 966 Kupe EBITDAF $m 107 94 78 69 Non-core net assets held for sale $m 19 Total Generation GWh 6,427 6,606 6,248 6,248 Equity Value $m 1646 Variation from mean hydro and w ind GWh -254 0 0 0 Shares Outstanding m 1000 Thermal Fuel cost (inc T/D) $/MWh 63.11 61.03 61.24 60.42 DCF Equity Value per share $ p.s. 1.65 Ratios 2014A 2015E 2016E 2017E Risk free rate % 3.50 EPS (adj) cps 6.9 8.0 9.5 9.6 Post-tax market risk premium % 7.0 PE (adj) x 24.7 21.4 18.0 17.9 Asset beta 0.6 EV/EBITDA x 8.7 7.8 7.8 8.0 WACC % 7.98 Effective tax rate % 31 28 28 28 Payout ratio (NPAT) % 188 200 172 176 Payout ratio (adj FCF) % 80 87 85 92 DPS cps 13.0 16.0 16.4 16.9 Imputation % 100 100 100 100 ROE % 2.6 6.0 5.1 5.2 Net Debt $m 958 966 959 944 Net Debt/Equity % 51 52 51 52 Net Interest Cover (EBIT) x 2.0 3.3 2.9 3.0 SIB capex $m 55 45 45 46 SIB capex/depreciation % 54 46 46 48 Cashflow Analysis 2014A 2015E 2016E 2017E Balance Sheet 2014A 2015E 2016E 2017E Pre-taxation Profit $m 72 157 132 133 Cash $m 23 30 30 30 Depreciation & Amortisation $m 157 149 141 134 Receivables $m 216 196 204 202 Tax (Paid)/Credit $m (13) (41) (37) (37) Inventories $m 94 75 78 78 Other $m 1 (41) - - Investments $m 342 294 319 272 Gross Cashflow $m 216 224 237 230 Property, Plant & Equipment $m 2,759 2,704 2,728 2,675 Changes in Working Capital $m 21 3 2 (0) Intangibles $m 128 128 128 128 Operating Cashflow $m 237 227 239 230 Other Assets $m 67 118 118 118 Acquisitions $m (1) - - - Total Assets $m 3,629 3,546 3,605 3,503 Capital Expenditure $m (82) (45) (45) (46) Current Payables $m 195 159 165 164 Asset Sales $m - - - - Short Term Debt $m 12 19 19 19 Other $m - - - - Long Term Debt $m 977 955 970 938 Investing Cashflow $m (83) (45) (45) (46) Other Liabilities $m 565 573 573 573 Equity raised $m - - - - Net assets $m 1,881 1,840 1,877 1,808 Dividends paid $m (121) (146) (161) (166) Total Liabilities $m 1,749 1,707 1,728 1,695 Other $m - - - - Shareholders' Funds $m 1,881 1,841 1,877 1,809 Financing Cashflow $m (121) (146) (161) (166) Minority Interests $m 0 0 0 0 Net Change in Cash (inc FX) $m 33 35 32 18 Total Shareholders' Equity $m 1,881 1,841 1,877 1,809 Source: Company data, Macquarie Research, July 2015 29 July 2015 2
Fundamentals Macquarie Quant View The quant model currently holds a strong negative view on Genesis Energy. The strongest style exposure is Valuations, indicating this stock is under-priced in the market relative to its peers. The weakest style exposure is Price Momentum, indicating this stock has had weak medium to long term returns which often persist into the future. 338/375 Global rank in Utilities % of BUY recommendations 29% (2/7) Number of Price Target downgrades 1 Number of Price Target upgrades 1 Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Utilities) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. 0.8 0.3 0.0-0.2-0.8-1.1-3.0-2.0-1.0 0.0 1.0 2.0 3.0-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. 0.4 0.1-0.2-0.7-1.0-0.5-3.0-2.0-1.0 0.0 1.0 2.0 3.0-70% -50% -30% -10% 10% 30% 50% 70% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score -1.05 0.41 0.07-0.52-0.56-0.72-0.29-0.29-0.55-0.31 0.68 Percentile relative to sector(/375) Percentile relative to market(/414) 0 50 100 0 50 100 0 0 1 1 Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 29 July 2015 3
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 100% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2015 AU/NZ Asia RSA USA CA EUR Outperform 46.23% 58.36% 47.27% 44.20% 60.65% 43.01% (for US coverage by MCUSA, 9.68% of stocks followed are investment banking clients) Neutral 37.67% 25.65% 29.09% 49.29% 34.19% 40.93% (for US coverage by MCUSA, 5.53% of stocks followed are investment banking clients) Underperform 16.10% 15.99% 23.64% 6.52% 5.16% 16.06% (for US coverage by MCUSA, 1.38% of stocks followed are investment banking clients) GNE NZ vs NZSE50, & rec history (all figures in NZD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, July 2015 12-month target price methodology GNE NZ: NZ$1.65 based on a DCF methodology Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. Date Stock Code (BBG code) Recommendation Target Price 29-Apr-2015 GNE NZ Underperform NZ$1.65 24-Feb-2015 GNE NZ Underperform NZ$1.82 09-Feb-2015 GNE NZ Underperform NZ$1.88 09-Dec-2014 GNE NZ Underperform NZ$1.80 27-Aug-2014 GNE NZ Underperform NZ$1.74 06-May-2014 GNE NZ Underperform NZ$1.90 Target price risk disclosures: GNE NZ: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. 29 July 2015 4
None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. 29 July 2015 5