First NZ Capital raises Genesis target price

Photo / File

First NZ Capital has raised its target price for Genesis Energy to $1.97 from $1.85, but has retained its neutral rating on the stock.

New Zealand's largest electricity and gas retailer recently set out a new strategy at an investor day, in which it said it was seeking to move from a stock being held for regular dividend payments, to one in which it would deliver both growth and dividends. As such, the new management team have ruled out capital returns such as special dividends or buybacks in the next few years, although the ordinary dividend payment is to continue.

This change is to ensure Genesis has money available for investment, with FNZC's equity research team suggesting one target could be an existing LPG bottle business.

Genesis is targeting earnings before interest, taxation, depreciation, amortisation and revaluation of financial assets of around $400 million by full-year 2021.

The company is seeking to win and retain retail customers by offering innovative products and services, rather than engaging in discounting, with improved customer service seen as key to reducing churn and ensuring that the business rewards loyalty.

FNZC say a potential shutdown of the Tiwai aluminium smelter remains Genesis Energy's largest risk, and its modelling suggests that Genesis' share price would be worth around $1.73 if Tiwai closed by January 2018 and prices of $80 per megawatt hour were the norm until 2027. The report suggests Tiwai's closure is a low-probability risk and the likelihood of it occuring is around 15 percent.

A neutral rating is maintained because the analysts argue that it is trading very near underlying value and the yield trade is unwinding, a process that's been accelerated by the US election result.

Shares in Genesis Energy were unchanged at $2.00. They've risen 3.6 percent since the start of the year.