Global markets were generally overnight, with the US market down (S&P 500 Index -0.5%) on the back of rising covid-19 cases and poor newsflow, while the Nasdaq Index was in the green, adding to gains as a relative safe-haven.
Closer to home, the big news yesterday was that New Zealand Aluminium Smelters – a joint venture between Rio Tinto and Sumitomo Chemical Company – gave Meridian notice to terminate the Southland smelter’s power contract when it expires at the end of August next year.
The smelter uses almost 14% of NZ's power generation, and the mining giant had been reviewing the business for the past nine months to weigh up its viability as the cost of energy squeezed margins amid weak aluminium prices. This saw the gentailer sector take a hit yesterday as there will be excess power supply in the market in the near term.
Contact Energy bore the brunt of the blow, dropping 14% as Chief executive Mike Fuge said the “disorderly exit” was “very disappointing”. Contact will defer the development of a second geothermal power station in Tauhara and consider closing its thermal power station in Stratford to offset the loss of the smelter. The nation's largest generator, Meridian fell 10%, snapping six days of gains, and together with Contact is the most affected. Longer term however, this could be an opportunity to release power to the North Island and Canterbury regions, and also reduce the reliance on coal, and accelerate a shift towards more hydro energy. This process cannot be undertaken overnight and the infrastructure to required to get the power generated to the North Island has been estimated at having approximately a 3-year build time.
Genesis Energy (GNE:NZX / GNE:ASX)
Of the major gentailers, we believe Genesis will be the least affected by the Tiwai Point decision. Being predominately a North Island generator – it said the closure was an opportunity to accelerate electrification of industry and it would reassess its generation portfolio.
Importantly, we think that GNE should be able to sustain its dividend levels with only minor downside – likely not greater than 10%, while peers may see a 20% reduction in dividends over the next couple of years.
We currently have a BUY rating on Genesis Energy.
Australia & New Zealand Market Movers
The Australian market was higher on Thursday (ASX 200 +0.6%) as shares in Afterpay led a rally among tech stocks, while mining and energy stocks also boosted the market.
Shares in Treasury Wine Estates fell after another profit warning from the new CEO of the winemaker. Treasury Wine said its core earnings for the 2020 financial year had fallen by 21%, compared to the prior year, amid the coronavirus pandemic and travel restrictions. The company now expects earnings to come in between $530 million and $540 million, with a decline of 14% in Asia, 37% in the Americas and 16% in Australia and New Zealand. Due to the uncertainty caused by the pandemic, Treasury did not provide guidance for the 2021 financial year.
The New Zealand market fell sharply yesterday (NZX 50 Index -2.3%), weighed down by the electricity sector companies as investors repriced power companies that would have to cope with an oversupply of electricity putting pressure on margins and hence profits and dividends.
In other news, Summerset posted the day’s biggest gain, rising after it warned first-half underlying profit could be up to 16% lower than last year as the virus outbreak halted construction as well as property settlements. This was not as bad as the market had feared.
The Warehouse Group also rose after it reported online demand had been strong since stores reopened after lock-down. Year-to-date online sales were up 54.8%, representing 11.8% of all group sales, but the company hasn't provided formal earnings guidance.
3 Things Markets Will be Watching this Week
- Covid-19 newsflow around a second wave and re-opening of economies remains top of mind.
- The Reserve Bank of Australia makes an interest rate decision on Tuesday.
- Trade tensions with China remain a risk to keep an eye on.
Have a Great Day,