Well ... is Mighty River Power a good investment or not?
It depends on your circumstances.
For those who want to build serious wealth over the long term, Mighty River Power does not offer the type of certainty that can be found in other investments.
For those looking for income, Mighty River Power offers a yield of somewhere between 6% and 7% and therefore looks like a worthy proposition, at least for the short term anyway. It was not long ago that New Zealanders would scoff at only achieving a 6½% or 7% yield on an investment whereas now it is a good rate when compared to what else is available.
So, Mighty River Power might be attractive to those looking for income as it offers a good yield compared to other alternatives.
Mighty River Power As An Investment
It's about investing isn't it?
As I have already mentioned, Mighty River Power looks like a reasonable YIELD PLAY and is suitable for investors looking for regular income now.
It is difficult to know how successful Mighty River Power will be as an investment in the long term.
Those who invested in Contact Energy several years ago might be happy with their investment. Although Mighty River Power is not the same as Contact Energy, there are similarities.
To me the most obvious similarity is the classic large corporation with significant capital infrastructure that will require maintaining and ultimately replacing at some point in the future. This means that like Contact Energy, Mighty River Power's ability to use its capital at a rate above 15% will be a real challenge. In fact, it would appear unlikely.
In the short term no one cares about how well the business uses capital. They either look for the share price to rise or for a decent dividend. Longer term though, the ability of the business to use capital is key to building long term wealth for the investor.
Some Good Points
- Mighty River Power is a large organisation with scale in New Zealand;
- It is currently a popular investment and therefore would be well supported which means the share price at least in the short term will also be well supported;
- Although it depends on the final strike price, a yield at between 6% and 7.5% looks attractive (particularly for those wanting income);
- The income projections over the next couple of years look promising and would underpin an increased dividend along with a rising share price if those projections can be delivered. Although this point is somewhat speculative, the government will be looking for this float to be a success which again may underpin the share price (not a good reason to invest mind you);
- The underlying infrastructure is based on hydro and geothermal power which are renewable resources;
- To some extent the demand for power in the short term at least could be considered somewhat predictable (when compared to other types of investments that are less predictable (e.g. the price of lamb or beef);
- All things equal, Mighty River Power should provide ongoing sustainable cashflows for the foreseeable future (assuming none of the risks become significant);
- Recent write downs from investments in Chile and Germany theoretically at least "polish the balance sheet" so to speak, making it more attractive now than was previously the case;
- Mighty River Power has scale in New Zealand providing about 20% of the country's power needs. In theory this should provide a fairly sound/defensive position which should flow through earnings keeping them relatively stable;
- Some say many years of capital intensive investment has come to an end which has resulted in the geothermal plants in the central North Island region. That in theory should mean lower capital costs in the immediate future. This could mean the freeing up of some funds to help support dividends to shareholders.
What's Not To Like?
- Government regulation for example the proposed price capping policy as put forward by Labour and the Greens:
- Any capping of wholesale electricity prices is likely to impact the profitability of the Generation part of the business. It may in particular impact the South Auckland Southdown Gas fired plant, which is only run when wholesale electricity prices go up or when lake levels get low. It’s unclear how this plant can be run profitably if the prices are capped:
- Drought is bad for power companies;
- The lake water level is sitting at the low end of Mighty River Power's operating levels at the moment;
- Whilst theoretically people always need power, there is growing evidence that the growth in demand is slowing;
- Tiwai Aluminium Smelter is a threat that may pass as it has done in the past however should the unthinkable happen, how could Mighty River Power continue to grow the business on the back of lower demand?;
- Limited scope for growth on the basis of limited ability to develop global scale. Recent evidence suggests this is a bad experience for shareholders anyway;
- Mighty River Power is promoted as a safe utility type investment (everyone will always need electricity - right?) which has created a degree of support and undue popularity. The fundamentals of the underlying business do not support the listing popularity;
- Value Investors like a price/earnings ratio of around 10. The average for the New Zealand sharemarket is around 15. Mighty River Power will be trading at a 2013 price earnings multiple of 34 to 41 and a 2014 price earnings multiple of 20 to 24. That looks expensive! To put that another way, using this method the buy price of the shares on list will not be cheap. Contact Energy trades at a PE multiple of around 18.5;
- The bonus one for 25 shares for those that hold for two years looks like a dilution of shares. In simple terms this means the value of your shares are worth less every time you add more shares to those already on issue. This would have a small but relevant decrease in the yield per share at that time. It would also decrease the real value of the shareholders wealth too:
- With a dividend payout ratio of between 80% and 110%, I struggle to see how Mighty River Power will be able to generate long term growth for investors. This does not mean that the excitement and popularity of the list will not drive the share price higher. For example, Contact Energy traded at a high of over $9 prior to the global financial crisis and now trades at around $5.50 which I believe is based largely on its ability to pay a 6% dividend each year rather than the significant underlying capital costs which the market either unwittingly or knowingly chooses to overlook.
Those looking for income could consider investing.
Those looking for a popular investment with the safety of a yield in the first year or so might consider it. Those looking for significant long term growth may not want to bother.
Short term though, there will be support for the share price because of its popularity so even those looking for long term growth might consider investing perhaps for a short to medium term and then look for other options.
What Should You Do?
It is important to realise this is a new listing or as the Americans call it, an Initial Public Offering (IPO). It is a different type of proposition to investing in a business that has a track record.
Whilst we can reach some general conclusions about how good this investment might be, it is to some extent a set of conclusions based on estimates, guesses and some analysis.
If Mighty River Power can deliver on its promised significant increases in earnings throughout 2014 then it is likely the share price will rise and those who invested might feel a little smug.
Those who did not invest in that situation might regret it. Longer term though, Mighty River Power is only one of a number of options available.
The investment has been touted as an investment for everyday Kiwis which actually seems about right. Although there are no guarantees, the outright solvency risk of Mighty River Power looks low and therefore a reasonably secure bet for the everyday Kiwi.
If you are not sure what to do, or would like find out how Wise Planning can assist you with finding alternative investments that are more suited to your investment needs, please contact Wise Planning at firstname.lastname@example.org.