In a report released last week, broker Macquarie updated its guidance for Contact Energy Ltd (ASX: CEN) shares.
Contact Energy is a diversified and integrated energy company. It owns a fleet of hydro, geothermal, and gas-fired generation assets, which produce close to 25% of New Zealand's electricity. It also retails electricity and gas to nearly half a million customers.
Its share price has risen 7.62% over the last year. For context, this is slightly below the S&P/ASX 200 Utilities (ASX: XUJ) index.
However, Macquarie sees strong upside for this ASX utilities stock. The broker has placed an "outperform" rating on the company.
Here's what the broker had to say.
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Strong upside
Macquarie resumed coverage of Contact Energy after its Manawa Energy acquisition, which it sees as a good strategic fit that adds value and boosts earnings, with expected long-term benefits including $40 million in annual synergies by 2028.
The deal is seen as financially positive, and while near-term guidance is cautious, Macquarie believes earnings could be stronger due to rising electricity prices and forecasts a small increase in dividends over the next two years.
We see CEN's normalised EBITDAF forecast as conservative due its use of a medium term wholesale electricity price of $120/MWh real vs current futures of ~$170/MWh (MacqE $140/MWh) – almost a $100m differential. Note, since the deal was announced, the NZ wholesale electricity futures curve has firmed by ~25%.
Macquarie also notes that the acquisition wasn't heavily contested, likely due to regulatory hurdles, and sees Contact Energy's conservative profit forecasts as leaving room for upside if electricity prices remain strong.
Updated price target
It's important to note that Contact Energy's primary reporting currency is NZD.
When issuing target prices, analysts usually use the company's base currency for consistency with its financial reporting, earnings, and valuation models.
Macquarie's updated price target is NZD $11.53.
Contact Energy shares closed trading last week at $9.10 NZD.
This indicates an upside of 26%.
Speaking on the updated price target, Macquarie said its price target moves to $11.53 (previously $11.20) on incorporation of MNW acquisition (~$0.25ps) and incorporation of monthly op stats.
We see the balance of risks in our catalysts (above) skewed to the upside. We resume coverage with an Outperform recommendation (prev O/P).
It's worth noting this ASX utilities stock also currently offers an attractive dividend yield of 4.21%.
