Renewable Energy Expansion Will Fuel A Bright Future

Key Takeaways

• Accelerated renewable and hydro capacity expansions, along with policy tailwinds, position Meridian for sustained earnings growth and greater operational resilience.
  
• Retail digitization and ESG alignment enhance customer retention, efficiency, and funding access, supporting long-term competitive advantage and value creation.
  
• Heavy reliance on hydro, rising costs, regulatory risks, and project delays threaten profitability, dividend sustainability, and earnings growth amid climate and policy uncertainty.

Catalysts

Engages in the generation, trading, and retailing of electricity to residential, business, and industrial customers in New Zealand, Australia, and the United Kingdom.

• Rapid acceleration of renewable generation build-out-Meridian is targeting $2 billion in capital spend over the next three years, with construction underway or approved for several large-scale solar, wind, and battery projects; the expanded pipeline directly supports topline and earnings growth as new capacity comes online to meet sustained demand for clean energy.
  
• Fast-tracked approval for additional hydro storage (Pukaki contingent storage) is expected ahead of winter 2026, enabling more hydro generation in an average year and creating a stable, lower-cost, and higher-earning operating environment; management quantifies this as an earnings uplift of $12–$15 million per year and improved revenue and net margin resilience during dry years.
  
• Strong electrification and decarbonization tailwinds-declining domestic gas availability and robust policy/market support for renewable energy are accelerating sector investment, increasing long-term electricity demand from transport, industry, and residential sectors; this expands Meridian's addressable market and is likely to drive sustainable revenue and EBITDA growth.
  
• Digitization and vertical integration in the retail business, including migration to the Kraken platform and development of new customer products (e.g., decarbonization support, EV charging, demand management), are driving customer growth (10% year-on-year), higher customer retention, and operational efficiency, which will support higher future net margins as retail costs fall post-transformation.
  
• Institutional and government preference for ESG-aligned investments, demonstrated by Meridian's high Dow Jones Sustainability Index score and readiness for green bond issuance, will lower the company's cost of capital and support relative valuation premiums, positively impacting future earnings and funding flexibility for growth projects.

Meridian Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Meridian Energy's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -9.3% today to 10.9% in 3 years time.
• Analysts expect earnings to reach NZ$515.3 million (and earnings per share of NZ$0.2) by about August 2028, up from NZ$-452.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NZ$580.8 million in earnings, and the most bearish expecting NZ$422.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 40.0x on those 2028 earnings, up from -31.4x today. This future PE is lower than the current PE for the AU Renewable Energy industry at 121.8x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.37%, as per the Simply Wall St company report.

Meridian Energy Future Earnings Per Share Growth

Risks

• Meridian's heavy reliance on hydroelectric generation leaves it highly exposed to hydrological volatility and climate change effects (e.g., droughts, changing rainfall patterns), as evidenced by the two one-in-90-year droughts and decade-low earnings-future repetition of such events could cause further sharp declines in revenues and earnings.
  
• Rising operational and maintenance expenses, including significant increases in asset management and ICT costs, as well as higher maintenance requirements from an aging and expanding asset base, may outpace revenue and margin growth, putting sustained pressure on net profit margins.
  
• The sustainability of Meridian's current dividend policy is under pressure-recent dividends have been maintained only by increasing debt, and repeated adverse operating years could force dividend cuts to protect credit ratings (BBB+), likely impacting investor returns and share price.
  
• Heightened regulatory and policy uncertainty creates downside risk, with potential for new government interventions following the Commerce Commission's Frontier report; such interventions, depending on their scope, could force pricing or structural changes that lower future profitability.
  
• Supply chain disruptions, project delays (as seen with Te Rere Hau and Ruakaka Solar Farm), and higher financing costs amid potentially rising interest rates threaten to inflate capital expenditure and delay new project revenue, thereby constraining long-term earnings growth.

Valuation

• The analysts have a consensus price target of NZ$6.352 for Meridian Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$6.72, and the most bearish reporting a price target of just NZ$5.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$4.7 billion, earnings will come to NZ$515.3 million, and it would be trading on a PE ratio of 40.0x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of NZ$5.42, the analyst price target of NZ$6.35 is 14.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.