Company Overview: Meridian Energy Limited (ASX: MEZ) is engaged in generating 100% renewable energy from renewable sources – wind, water, and sun. It supplies electricity to its customers from the electricity grid, which combines electricity supplied from renewable and non-renewable sources.

­­­­­­MEZ Details

Material Business Updates

Historical Financial Trend:

MEZ illustrated sustainable historical growth while keeping the value proposition intact. The Operating revenues have been growing since FY17 until a marginal dip was witnessed in 2020 with consistent increase in net income. Operating revenues grew at a 16.7% CAGR (FY17 – FY21).

Historical Financial Overview

Key Takeaways from Monthly Operating Report (May 2022)

H1FY22 Financial Highlights:

Top 10 Shareholders:

The top 10 shareholders together form ~58.14% of the total shareholding. New Zealand Treasury and Accident Compensation Corporation hold a maximum stake in the company at ~­­­50.73% and ~2.02%, respectively.

Key Metrics:

Revenue was amplified by favourable NZ Retail contracted sales while gross margin faced a minimal dip as energy margin shrunk across all segments. The current ratio stood steady to support the working capital requirements.

Outlook:

Key Risks:

The company is exposed to the risks of adverse hydrological conditions such as drought or dry periods in the Waitaki or the Waiau catchments. The electricity sector is susceptible to numerous regulatory reviews, including the reviews of the 9 August 2021 power outages and the Electricity Authority’s Wholesale Market Review.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Stock Recommendation:

The stock of MEZ gave a negative return of ~19.32% in the past year. The stock is trading lower than the 52-week average price band of $3.970 - $5.190. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). Considering the significant regulatory influence and susceptibility to hydrological disruptions, the company might trade at a slight discount to its peers’ EV/Sales multiple average. For valuation, a few peers like Genex Power Ltd (ASX: GNX), Delorean Corporation Ltd (ASX: DEL), Origin Energy Ltd (ASX: ORG) and others have been considered. Given the decent financial position from asset restructuring, improved cash flows, sustainable top-line trend, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $4.010, up by ~0.75% as of 15 June 2022.

Markets are currently trading in a highly volatile zone due to prevailing macroeconomic and geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.

MEZ Daily Technical Chart (Source: REFINITIV)

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.