Profit surge lifts hope on Contact price

Shareholders are holding out for a better price from Edison Mission. CHRIS DANIELS reports the views of analysts and investors.

It has been two weeks since United States energy giant Edison Mission offered $1.08 billion for the half of Contact Energy it did not already own.

Immediately the share price headed skywards - well above the $3.85 a share offered - and there it has remained.

Thousands of investors think Edison is seriously undervaluing Contact and are holding out for a better offer.

Their hopes have been buoyed by yesterday's announcement of a 34.8 per cent surge in net profit to $130.7 million for the year to September 30.

It was a beautiful year for Contact - cold and dry. Competitors hoarded precious water in hydro storage lakes, while Contact was able to crank up all its thermal, gas-fired power stations to run at capacity.

As others, such as the largely privately owned Trustpower, were haemorrhaging money, Contact was laughing all the way to the bank.

Yesterday's unaudited results show a huge increase in all the numbers that count - sales revenue up from $779 million to more than $1 billion; a net profit of $131 million, up from $97 million the year before.

Chairman Phil Pryke, announcing the results in Wellington, took great pains to say at the outset that he would make no comment about the Edison takeover bid.

He is one of the three independent directors who will announce soon, after a valuation report is received, whether the $3.85 a share offered by Edison is fair.

Although he would not say how much he thought Contact was really worth, he did tell a story of great success, largely due to the sky-high price of power on the wholesale market over winter.

Revenue earned from the wholesale electricity market increased from $270 million to $716 million.

It is this kind of success that Edison Mission now wants to own outright.

If Edison Mission's takeover is successful, and Contact is delisted, it will go the way of BNZ and Petrocorp - completing the full journey from hands-on Government control to a state-owned enterprise, to NZSE listing, to a subsidiary of an overseas group.

Shareholders are now being asked to decide exactly how valuable they think Contact is.

Analysts studying the electricity market are providing the sort of guidance Edison would be none too happy about: too cheap, they say.

Born from the split-up of ECNZ, trading as an SOE, Contact was sold by the National Government in 1999: 40 per cent to Edison Mission and the rest offered in a public float.

"Mums and dads" were duly encouraged to buy into the company and most of the 136,000 shareholders own fewer than 5000 shares each.

They are now faced with deciding whether to sell up and put their money elsewhere or fold their arms and hope that the Americans come back with a better offer.

One champion of the small Contact shareholder is Wellingtonian David Zwartz.

He has challenged the company for its lack of women in senior management positions and last year forced it to back down on its attempt to increase directors' fees.

He says he is holding on to his shares in expectation of a higher price being offered.

"With Contact expanding into Australia, that strengthens the case for holding on to the shares.

"If you sell your shares now, you certainly get a capital profit if you bought at the initial offer price of $3.10 - but where do you put your money? If you invest because you want to get a return, my feeling is you stick with [Contact]."

Prospects of good dividends are another reason analysts are putting a big price tag on Contact.

Although no dividend was announced yesterday, the company has been increasing dividend payouts by 10 per cent each year.

One may be announced before Edison's takeover offer lapses on November 30. With the policy of increasing the payouts by 10 per cent each year, the dividend for the past year would be $19.1 million.

Mr Zwartz is among the ranks of those who think that Edison, since it already owns 51 per cent of Contact, must know it is on to a good thing - all the more reason for other shareholders to hang on to the shares.

"Their intention to make a complete takeover must be because they think it's a very good business," he said. "They're probably getting it at a good price, and that would make me think that it's worth hanging on to see what is going to happen next rather than sell now."

ABN Amro analyst James Miller has found himself at the centre of market speculation about the true value of the company.

He says the answer is clear - Contact is worth a lot more than Edison is offering.

Its offer price of $3.85 shows what the company used to be worth, says Mr Miller, and does not reflect the new structure of the New Zealand electricity market.

This new reality has been apparent all along to the people at Edison, but not to local investors.

"You've got very interesting numbers, which Edison Mission are fully aware of.

"They have taken advantage of the inertia of an inefficient market to actually move in quickly with a cheeky bid."

Momentous events of the past year, particularly during winter, mean Contact is worth much more.

"It's black and white, night and day material."

Grant Samuel and Associates - whose job it is to put a fair value on Contact - should accept the momentous changes and recommend a fair price of more than $4.90 a share, says Mr Miller.

The big four power companies all restructured in the past year, integrating generation with retail.

"They are all minimising risk positions, getting balance sheets in line, securing access to key fuel markets and reducing their own risk structures."

Mr Miller says the SOEs - Genesis, Meridian and Mighty River - would be prime investment opportunities should any government put them on the block.

"In years to come, if they ever list, they'll be the bluest of blue chips," he says.

It is this kind of optimism, with predictions of big dividend payouts and an asset growing in value, that Edison has spotted in Contact Energy.

But Contact's shareholders look as if they may want to see a little more money before they hand over that kind of a rosy future to Edison.