WEEKLY STOCK COMMENT: TRUSTPOWER
Roy Davidson, 28 June 2018
Trustpower (TPW) is a New Zealand’s fifth largest electricity generator, and a sizeable retailer of electricity, gas and telecommunications services. TPW’s New Zealand electricity assets comprise 19 hydro schemes. Infratil (IFT) owns 50.7% of TPW, while the Tauranga Energy Consumer Trust owns 26.8%.
Electricity demand has been relatively flat in recent years resulting in limited growth opportunities in the New Zealand electricity generation market. TPW has focused on gaining a larger share of the retail market and moving into additional larger metropolitan markets (Auckland, Hamilton and Christchurch). It has done this through a strategy of bundling services (electricity, gas and broadband), coupled with an advertising push. This has so far yielded results with strong uptake of its new offering.
TPW recently demerged its wind generation assets and development options in Australia and New Zealand. The demerged entity has been named Tilt Renewables (TLT) and is listed on both the NZX and the ASX. The rationale behind the demerger is to allow TLT to more easily raise the equity needed to pursue its renewables developments, while providing greater investment choice for shareholders.
Post demerger, TPW provides a defensive, cash generative utility exposure. The company has a portfolio of hydro generation assets and is pursuing its multi-product retail offering. TLT on the other hand provides a higher growth exposure to Australia’s renewable buildout. TPW will now target a payout ratio of 70-90% of free cash flow, up from 60-70% prior to the demerger, in line with the sector average and reflecting the fact that the company will no longer need to fund additional renewable projects in Australia.
TPW is a steady dividend payer operating in a defensive industry. The company generally has high customer retention resulting from its loyalty initiatives, its multi-product offering, and its profile as a regular supporter of community activities. We see potential in TPW’s multi-product offering, which has had solid take-up, and has seen TPW take share from its competitors.
Risks to TPW include: 1) regulatory change, 2) declining aggregate demand, 3) increased competition.