Meridian Energy Ltd., which is selling shares in New Zealand’s largest initial public offering, faces years of strong cash flow that will underpin its dividends, according to Edison Investment Research.
Weak electricity demand means New Zealand generators have abandoned plans to build new plant, and they are accumulating cash that will be reflected in high dividends, Auckland-based analyst Bruce McKay said in an interview. Meridian forecasts a 2014-15 gross dividend yield of 9.2 percent based on a possible IPO price of NZ$1.60 a share.
“They’re not spending money chasing resource consents and planning how they are going to build the next power station,” McKay said. “They’ve got costs under control. They have been conservatively managed in terms of their balance sheet. They have a lot of free cash.”
New Zealand’s government is seeking about NZ$2 billion ($1.7 billion) from the sale of as much as 49 percent of Meridian, the nation’s largest power company. The sale, which closes for institutional bids on Oct. 23, is part of a government asset-sales program forecast to raise about NZ$5 billion.
Meridian shares are expected to be priced in a range of NZ$1.50 to NZ$1.80 apiece ahead of the Oct. 29 stock-exchange listing, the government said in the offer document. Individual investors will pay no more than NZ$1.60.
The shares are worth NZ$1.70 to NZ$1.86, Edison said in an e-mailed research note, released today as part of an initiative by NZX Ltd., operator of the New Zealand stock exchange, to encourage investor knowledge and interest. The valuation reflects the outlook for cash generation, and incorporates Meridian’s “conservative” forecasts, Edison said.
The main risk faced by investors is that a switch to a Labour Party led government at the 2014 general election may change industry regulation, Edison said. The main opposition party earlier this year said it would establish a central planning agency to buy all power in the wholesale market, and would require generators to split their retailing units to force down prices.