With the share price having fallen 22% from the IPO last year, does the New Zealand-based Mighty River Power Ltd (ASX:MYT) have any appeal?
There’s a lot to like about this electricity utility – 90% of production is derived from renewable sources (hydro & geothermal) and it supplies 18% of New Zealand’s electricity needs. With the opening of the world’s largest geothermal binary power station (Ngatamariki), Mighty River has developed a depth of expertise with this type of source. Although initially capital intensive both geothermal and hydro are reliable base load generators and have extremely low operating costs once built. They are also far more efficient than other sources of alternative energy.
Negatives with Mighty River Power include the slow growth of the electricity market, competition pressures, the possible closure of the Tiwai Point aluminium smelter and potential political risks (Mighty River has 51% government ownership).
Financially, Mighty River stacks up well – a forward price earnings ratio of 14, net debt / equity 32%, selling below asset backing and a 7% fully franked dividend yield. Australian taxpayers should be aware the imputation credits can only be claimed against other New Zealand income, as Mighty River Holdings has no business activities in Australia. However exposure to the NZ$ is no bad thing.
An interesting comparison can be made with Origin Energy Limited (ASX:ORG), as it too is a vertically integrated (exploration/development/retailer) energy supplier. Origin currently supplies 13% of Australia’s power needs and has a controlling interest in Contact Energy, one of New Zealand’s largest energy retailers.
At $14.67, Origin is selling at an underlying price earnings ratio of 20, a mostly franked dividend yield of 3.6% and a net debt / equity ratio of 55%. It is also selling at a substantial premium to net assets, making it no bargain when compared to Mighty River Holdings.
To compensate, does Origin Energy have significantly better growth prospects when compared to Mighty River Holdings?
In the short term no, however 2015 onwards should see a return to profit growth as the current wave of irrational discounting runs out of steam. In addition some benefits should be derived from the deregulation moves underway in NSW and Queensland. With deregulation comes the opportunity for second-tier suppliers to compete more effectively. Combined with the continuing fall in industrial demand and hopefully a more efficiency conscious retail market, overall demand is likely to grow at a snail’s pace.
Utilities are basic businesses and generally bought for income purposes, not capital growth. Allowing for this it is obviously important to avoid overpaying for the income producing asset. Using basic investment criteria, Mighty River Power ($1.83) is priced reasonably and Origin Energy ($14.67) is overvalued, even after taking into account Origin’s other significant interests.