Genesis Energy — High dividends from diversified energy model

Genesis Energy — High dividends from diversified energy model

Genesis Energy leverages its diversified energy business model to generate attractive shareholder remuneration, with Bloomberg consensus estimates implying an FY19e dividend yield of 7.2%, towards the top end of utilities globally. The company has a strong track record on delivering attractive remuneration to shareholders and on generating enough cash flow to cover dividend payments.

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Genesis Energy

High dividends from diversified energy model

Utilities

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31 October 2018

Price

NZ$2.34

Market cap

NZ$2,378m

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Share details

Code

GNE

Listing

NZX, ASX

Shares in issue

1,016.2m

Business description

Genesis Energy is a diversified energy company in New Zealand. It is the largest gas and electricity retailer in the country (~500,000 customers), and has a power-generation portfolio of 953MW thermal and 686MW renewable (almost entirely hydro). Genesis Energy also has a 46% interest in the Kupe joint venture, which owns the Kupe oil and gas field offshore of Taranaki, New Zealand.

Bull

Attractive dividend yield with strong historical track record on shareholders’ remuneration.

Strong focus on improving operational efficiency and cash flow generation.

Large low-cost/low-carbon hydro portfolio.

Bear

Coal assets are expected to be permanently discontinued by 2030.

Leverage at the top end of the targeted range.

Rising emissions costs expected to have a negative impact on earnings.

Analyst

Dario Carradori

+44 (0)20 3077 57 00

Genesis Energy leverages its diversified energy business model to generate attractive shareholder remuneration, with Bloomberg consensus estimates implying an FY19e dividend yield of 7.2%, towards the top end of utilities globally. The company has a strong track record on delivering attractive remuneration to shareholders and on generating enough cash flow to cover dividend payments.

Diversified/integrated energy business model

Genesis Energy’s strategic focus is to leverage its diverse power-generation asset mix to provide flexible services to a market characterised by a very high share of renewables (>80%), and to leverage its integrated fuel position to minimise costs for the company and its customers. Genesis is preparing for the energy transition, consistent with the government’s environmental policy of zero emissions by 2050. The key catalyst will be the strategic update at the Investor Day on 7 November.

Key focus is on attractive shareholder remuneration

Genesis Energy’s key focus is on maintaining an attractive dividend yield plus delivering growth, with a view of generating top-quartile total shareholder returns. Over the period FY14-18, the dividend yield averaged 7.5% and EBITDA grew 4% pa. Bloomberg consensus implies 7.2% FY19e dividend yield. Historically, Genesis’ cash flow generation has justified the high dividend payment – over the period FY15–18, the average payout ratio was 90% (calculated as a percentage of free cash flow, while the figure calculated on net income is significantly higher, at >200%). The current share price implies a 2019e EV/EBITDA of c 10x and a high P/E (38x) as earnings are depressed by high depreciation, depletion and amortisation (DD&A) – in FY18, DD&A was c 4x the ‘stay in business’ capex).

Consensus estimates in line with company targets

Genesis reported FY18 EBITDAF growth of 8% y-o-y to NZ$361m, mostly driven by acquisitions and record Kupe gas production. However, underlying net earnings were down 22% y-o-y to NZ$58m, reflecting costs related to brand and marketing (partly one-off), staff investments and an increase in DD&A. Bloomberg consensus for FY19 EBITDAF of NZ$359m is broadly flat y-o-y and in line with the company guidance of NZ$350–370m. Genesis expects FY20 EBITDAF to be affected by planned oil & gas field outage and increased emissions costs (consensus is NZ$369m), while the FY21 target is >NZ$400m EBITDAF (consensus NZ$392m). FY18 net debt/EBITDAF of 3.0x was at the top end of the targeted range of 2.4-3.0x and consensus expects it to remain at around that level in FY19.

Consensus estimates

Year
end

Revenue
(NZ$m)

EBITDAF
(NZ$m)

Underlying net income (NZ$m)

DPS
(NZ$)

P/E
(x)

Yield
(%)

12/17

1,951

333

74

0.166

32

7.1

12/18

2,305

361

58

0.169

41

7.2

12/19e

2,239

359

63

0.169

38

7.2

12/20e

2,257

369

74

0.174

32

7.4

Source: Bloomberg, Edison Investment Research.

EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2014]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

ERM Power — Refocusing on core business

ERM Power is refocusing on its core business by selling the US business and investing in the highest growth part of its Australian activities. We have increased our forecasts to reflect the accretive effect of the recent transactions and see more upside potential to the share price following the recent recovery as valuation multiples appear undemanding and the dividend yield is attractive.

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