One Renewable Energy Stock for Long-term Growth

As the market players are aware, the growth prospects of the global economy were derailed because of the global pandemic. Lockdowns were imposed so that the spread of COVID-19 can be prevented. Several companies faced hurdles because of the imposed restrictions. However, amidst challenging circumstances, some companies are expected to perform better moving forward. This company happens to be an electricity generator as well as the fourth largest energy retailer by market share. The stock of this company has delivered a return of ~21.5% in the span of previous 3 months. However, in the time span of previous 6 months, the stock has increased by ~30.3%.

Trustpower Ltd

Summary:

  • TPW is focused towards incremental value creation in generation, cost optimisation as well as volume gains.
  • TPW has recently announced the review of retail business. Notably, the review would be testing market interest in the retail business. It would also explore the merits as well as business case to establish the standalone generation business.
  • TPW is possessing capacity to grow as well as to participate strongly in the dynamic and fast-evolving retail environment, and to realise the opportunities offered by the need for increased electrification into the future.

Trustpower Ltd (NZX: TPW) is a New Zealand-based company which is engaged in the business of electricity generation and  it operates a multi- product retail business, including electricity, gas and telecommunication products. It has approximately 263,000 electricity connections, 42,000 gas connections and 106,500 telecommunications customers.

TPW generates a large amount of electricity which powers various homes and businesses across New Zealand. It has a strong focus on sustainable generation using hydroelectric power stations. TPW has gained the reputation of being NZ’s fifth largest electricity generator and fourth largest energy retailer by market share.

Decent Operating Performance in Q3FY21

The company has witnessed a decent performance in Q3FY21 driven by sustained growth in fixed line broadband business and the company added over 2,000 net customers during the period. As per the release, customer preference for the fast fibre products continues, with 78% of the broadband customers now on fibre (with 36% now on fast fibre, up from 28% previous year).

Notably, average products per customer continues to witness an increase, with 5.4% rise YoY in the number of customers that take two or more products. Further, more than 85% of new customer acquisitions during the period has adopted 2 or more products. As previously indicated, the loss of the small number of high-volume, low-margin customers is the driver of the lower C&I electricity volumes.

The company also witnessed a higher levels of customer contacts in Q3FY21 that was up by 8% compared to the pcp. It witnessed continued uptake of the digital service channels (82% of contacts handled digitally, a rise of 5%). Customer satisfaction and first contact resolution remained strong.

It was mentioned that south island generation production was 13% lower as compared to the pcp, because of scheduled outage at the Waipori scheme.

Wholesale Electricity Market (Source: Company Reports)

Sound H1 FY 2021 Performance

Despite the impact of the sub-optimal operating conditions due to reduced generation volumes and changes in Covid-19 alert level, the company has achieved 3% YoY growth in its operating earnings (EBITDAF) that stood at $110.4 million in H1FY21.

This was supported by proactive customer care and diversified digital customer service platforms in the retail business.

While generation EBITDAF witnessed a fall of 3% mainly because of continued dry conditions, in retail, the product as well as margin growth have contributed to the strong underlying result, with EBITDAF of $19.2 Mn, 38% higher as compared to the same period last year. The company has managed to post operating cash flow amounting to $71 million, reflecting a rise of 20%.

Recent Update

Trustpower has recently announced the review of the retail business. The company stated that electrification and decarbonisation, decentralised energy, digital trends in the service provision and utilities convergence are all shaking up the traditional operating models.

Notably, the Board would be examining the options available for the market position, considering the opportunities and changes. As per the release, the announcement of strategic review would also be having the fundamental implications for one of TPW’s major shareholders, the Tauranga Energy Consumer Trust (or TECT), as well as the existing rebate scheme, the TECT distribution.

Outlook

It was mentioned that the company is exploring opportunity to grow its share of the Fibre and Wireless Broadband markets. The company is possessing strong asset base in both generation as well as ISP infrastructure.  Meanwhile, the company guided its FY21 EBITDAF to stay between $185 - $205 million. Notably, generation volumes for FY 2021 have now been forecasted at ~1,702 GWh (incl KCE). This implies low volumes across the H1 of the year as well as current below average lake storage levels.

The company is anticipating FY 2021 capex to be in the range of $34 Mn - $44 Mn.

On February 5, 2021, the stock of Trustpower Ltd ended the trading session in green as there was an increase of 0.11% to NZ$8.900 per share.

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