New Renewable Projects Will Add Over 2 Terawatt Hours To New Zealand's Energy System

Key Takeaways

• Renewable project pipeline and retail transformation aim to increase revenue, market share, and efficiency, potentially improving net margins and customer engagement.
  
• Investments and advancements in energy storage and hydro flexibility could enhance operational efficiency, manage supply-demand, and lower electricity generation costs.
  
• Regulatory challenges and high operating costs, compounded by hydrological variability and gas supply issues, threaten Meridian's margins and financial stability amidst potential price dissatisfaction.

Catalysts

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

• Meridian Energy has a strong pipeline of renewable projects, including solar and wind farms, which are expected to add more than 2 terawatt hours to the New Zealand system. These projects will likely enhance future revenue through increased electricity generation capacity.
  
• The company's retail transformation, focusing on digital capability and new retail propositions such as smart time-of-use products, aims to improve customer engagement and expand market share, impacting revenue and possibly improving net margins through efficiency improvements.
  
• Investments in battery storage facilities, like the Ruakaka battery energy storage facility, optimize electricity supply and demand management, potentially increasing operational efficiency and positively affecting future earnings by reducing grid dependency.
  
• Advancements in hydro storage flexibility and regulatory changes could significantly lower electricity generation costs, providing a competitive advantage and improving net margins by leveraging low-cost hydroelectric resources.
  
• Continued strategic partnerships and PPAs, such as the joint venture with Nova, are expected to capitalize on synergies and enhance revenue streams through diversified energy generation and supply agreements.

Meridian Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Meridian Energy's revenue will decrease by 0.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 9.2% in 3 years time.
• Analysts expect earnings to reach NZ$459.1 million (and earnings per share of NZ$0.18) by about May 2028, up from NZ$117.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as NZ$367.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 44.5x on those 2028 earnings, down from 122.5x today. This future PE is lower than the current PE for the AU Renewable Energy industry at 67.5x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.61%, as per the Simply Wall St company report.

Meridian Energy Future Earnings Per Share Growth

Risks

• Continued gas supply challenges and high prices could negatively impact Meridian's operating margins as gas is often a marginal fuel during hydro droughts, potentially leading to increased costs for alternative energy sources.
  
• The persistent hydrological variability, including droughts and floods, significantly disrupts electricity generation, risking decreased revenue and profitability during such extreme weather events.
  
• Regulatory and operational uncertainties, such as limited access to contingent hydro storage, could prevent Meridian from adequately managing hydro resources, affecting energy prices and financial stability.
  
• High operating costs due to the need for demand response payments and other hedges during adverse conditions put pressure on net profits and could lead to decreased financial performance.
  
• Price increases for customers due to past levels of inflation and interest rates, alongside Commerce Commission-approved hikes in transmission and distribution prices, could affect consumer satisfaction and regulatory scrutiny, potentially impacting revenue growth.

Valuation

• The analysts have a consensus price target of NZ$6.386 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$7.1, 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$5.0 billion, earnings will come to NZ$459.1 million, and it would be trading on a PE ratio of 44.5x, assuming you use a discount rate of 6.6%.
• Given the current share price of NZ$5.48, the analyst price target of NZ$6.39 is 14.2% 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.