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In the rush to sign up to the Mighty River Power float, Bernard Hickey wants to point out a few risks

In the rush to sign up to the Mighty River Power float, Bernard Hickey wants to point out a few risks

By Bernard Hickey

Trying to wave down a stampede of elephants can be a thankless and possibly dangerous task, but someone's got to try do it.

Right now potential investors in Mighty River Power sound like the thundering herd.

They can smell the water in the muddy oasis on the other side of the hill and nothin's gonna stop them.

Demand for the shares in the state-owned power generator and retailer has appeared overwhelming in recent weeks.The speed and the number of pre-registrations blew expectations out of the water.

Demand was so heavy and fast it took down the registration website on the first day.

Institutional investors seem to be drooling just as much. New Zealand stocks generally have risen almost 30% in the last year. 

The two most comparable stocks to Mighty River, Trustpower and Contact Energy, have risen 21% and 16% respectively.

This salivation is all about dividend yield.

Bank and government bond interest rates around most of the world are in the 0-2% range and even in New Zealand, where term deposit rates are around 4%, there is huge investor demand for shares in solid companies with dividend yields in the mid to high single digits.

Also, trillions of dollars of money is being printed this year by central banks in the northern hemisphere to buy government bonds.

Investors are looking to invest that cash in other countries that generate real returns from economic growth and aren't printing money.

New Zealand is a prime candidate for investing this freshly minted money in solid dividend yielding assets.

Mighty River's yield from its solid market position is its main attraction.

It will remain 51% owned by the government and produces 17% of New Zealand's power. It has the dominant electricity retailer in the country's biggest residential market, Mercury Energy in Auckland, and produces 90% of its power from renewable means, including 30% from geothermal power, which isn't dependent on rain or wind.

It supplies nearly 1 in 5 New Zealand households and has 390,000 customers who have to buy its product every hour of the day.

Mighty River Power is forecasting a gross dividend yield of up to 7.7%, including imputation credits, which mean investors don't have to pay tax on the dividends. The cash dividend yield is forecast to be up to 5.5%.

It seems the surest of sure things. 'What could possibly go wrong,' the herd thunders.

Quite a lot, it turns out, if you read the 257 page offer document, as all potential investors should.

Firstly, Mighty River Power has a fair amount of debt and is forecasting to increase that debt by NZ$250 million to NZ$1.126 billion in the two years to mid 2014 as it ramps up its geothermal investments.

This higher debt and a rise in interest costs helps explain why its underlying earnings are expected to fall 13% next year.

Yet Mighty River Power isn't keeping anything in reserve. It is forecasting paying out 107% of its profits in dividends this year. In effect, it is borrowing a bit to pay next year's dividend.

There are risks aplenty in the offer documents outlook too. The expected closure of Tiwai Pt "could lead to a sustained reduction in electricity prices in general."

Electricity demand has also been strangely flat over the last four years, despite a growing economy. This breaks a century-long run of growth and suggests a structural change in electricity usage in New Zealand towards more efficient appliances and fewer factories could reduce demand.

Mighty River is also relatively expensive, forecasting a price to earnings multiple of up to 24.4, which is higher than the forecast multiples of 17 and 18 for Trustpower and Contact respectively.

There's a few red flags to distract the thundering herd.

It may still thunder on and drink happily from the oasis, but at least it has been warned.

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This article was first published in the Herald on Sunday. It is used here with permission.

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15 Comments

To me it has all the hallmarks of  savvy seasoned international level senior investors constructing another pump and dump ponzi pyramid scam with their many privileges and advantages that will leave the unsavvy inexperienced excitable junior investors left carrying a can of debt laden shares falling back in price with the senior elements long gone with the loot of those buying in as they were selling down.  

Iheard a Geen M P  on Radio Live this morning say that they are formulating a policy on MRP WHICH THEY HOPE WILL BE READY BY THE END OF THIS YEAR.
Frankly,i would like to know the Labour and Green policy before i purchase any shares,as i have heard both parties mention the possiblity of buying back the shares at purchase price.
Hugo Chavez would be proud.

Absolutely any shares should be bought back at the lower of market price or ipo price.
 The whole idea of selling shares in energy companies we already own is just another example of looting the public purse.
And then there is the provision of strategic infrastructre issue, something the market is not good at/cannot do.

Borrow to pay Dividends.  And massive other new borrowings.  Sounds like Solid  Energy.  That ended well. 

Calling hundreds of thousands of New Zealanders a "herd" is arrogant to say the least. Let's see if, in addition to being arrogant, the writer is also hypocritical: Bernard Hickey, did you pre-register for Mighty River Power shares?

My oxford minidictionary defines arrogant as'proud and overbearing
'Where does that fit into any of his comments.

re forecasting to increase that debt by NZ$250 million to NZ$1.126 billion in the two years to mid 2014 as it ramps up its geothermal investments.
 
Shades of Solid Energy

Mind you its a hiding to nothing for the junior shareholders of NZ INC as a whole at the hands of the savvy international senior financial sector any way you look at. When it comes to finance and equities there are senior and junior class privileges in every vehicle. If juniors buy in they face the scenario I outlined above and KH is on to, or if the juniors are not enticed into buying in the senior international elements will use their privileges as 'underwriters' to buy the shares at whatever price no matter what the fundamentals and use their ownership rights as backed up by the International Committee for Settlement of Investment Disputes which New Zealand are signed up with to gain via toll boothing profits of the target nations necessities of life resources what they missed out on if 'pump and dump' was not achieved.
If the senior elements often use two means of asset stripping, they load up with debt and portray it as profit, or they reduce maintanence programs and portray that as profit and sell out before it all blws to pieces.
Sadly what regularly happens is the senior elements in the long run achieve all of the above and succeed in taking the junior elements money privately and then junior elements pay even more via their taxes as their government cant leave these necessity of life infrastructure a broken down and inevitably ends up taking it back and fixing it up.
In the case of Solid Energy the senior elements were of course the international banking elements we are now not being allowed to know who they are, why? 

Risking a change of govt...an increase in debt servicing costs...a consumer/voter backlash as it dawns on the peasants they have been rorted on energy costs for some years...
It seemed to me the question to ask was...If you were Key et al and you sussed trouble ahead for SOE cash flow divs to Treasury...but also could see a market to sell into that was riding a bubble of credit........what would you do?
And high divs in 014 will be a big fat problem for this govt....so what is likely to happen...what secret chitchats will take place to determine the post 013 divs????

High-Stakes-Poker
John Key and RIO and Meridian are locking themselves into a deadly game of Blind-Mans-Bluff
 
While the possibility of RIO walking away and closing Tiwai is real it would invoke an exit clause in the contract, taking some years to transpire. The Government has a 3-5 year window to unload the power generating SOE's
 
Just how big it is, is explained in this excellent history in Stuff dated 7 April 2013
http://www.stuff.co.nz/business/industries/8518742/Tracing-the-history-of-Tiwai-Pt

"The Government has a 3-5 year window to unload the power generating SOE's".  
Unless Rio Tinto decide the best option for them is to shut down the smelter asap. 

Bernard Hickey and red flags - at least the thundering herd has been warned
 
An IPO that needs a 260 page prospectus is warning enough
An IPO priced at more than 20 time earnings is more than fully priced
 
The current float environment is similar to what is driving the "housing environment" .. with 30% allocation to International Institutions looking for a "safe haven", pricing becomes incidental .. dividends are incidental .. it's a case of how much they are willing to pay for safety ..

What you ask of subscribers en mass Bernard is due dilligence, what would you say the chances of that are....? What are the chances of fund managers doing it for them...?
 The biggest alarm bell I can see is the speculative content or P to E for each potential share offered.......did  Don Elder partake in the advisory panel to set the IPO.....cause it sure looks that way to me.
Is this excerpt correct..?...390,000 customers who have to buy its product every hour of the day....as in a captured audience without option.....the suggestion is 20% of retail power is monopolised.
This is the first cab off the rank here, it is meant to be the trendsetter for further asset sales, now if the herd doesn't bullrush the next ipo's you'd wonder who's gonna pick up the shortfall..?
I think you've got it right, it's a stampede, where rationale will give way to greed, it's the next offering or two that may bring in the heavy hitters.

Has anyone considered buying the bonds of the various energy suppliers instead of the MRP equity IPO?

As I see it they either float less than 49% to cover the prospective bonus shares or after two years the government gives itself enough new shares to maintain the 51%.
It all just looks like having a bonus when you ain't having one.

Days to the General Election: 27
See Party Policies here. Party Lists here.