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Contact Energy could be takeover target with renewables pipeline – CFO

New Zealand energy company Contact Energy [ASX:CEN] [NZX:CEN] could attract takeover interest as it transitions to 100% renewable energy with accelerated investment in its renewable pipeline, according to CFO Dorian Devers.

The CFO’s comment came in response to this news service’s question regarding Australia’s renewables players being bought off the ASX, with the most recent example being Genex Power [ASX:GNX] that recently received a AUD 318.6m (USD 227.5) bid from Skip Capital and Stonepeak, valuing Genex at 22.1x EV/FY23 EBITDA. 

Last year’s NZD 3.3bn (USD 2.0bn) acquisition of Australia and New Zealand’s largest pure-play renewable energy platform Tilt Renewables by QIC-backed Powering Australian renewables and Mercury Energy was valued at 28x EV/forward EBITDA.

Contact Energy, which has a AUD 5.56bn market cap, is aware of the rising interest in renewables and the high multiples being paid in Australian transactions, the CFO said.

“We will just continue to do what we're good at and we'll let other people work out whether we're valued appropriately from a market perspective,” he said. 

The company’s three large competitors Meridian Energy [NZX:MEL], Genesis Energy [ASX:GNE] [NZX:GNE] and Mercury NZ Limited [NZX: MCY] are all around 51% owned by the New Zealand government, making Contact Energy potentially more susceptible to M&A than its peers, according to a March 2021 Morning Flash report.

Contact Energy is currently trading at 13.25x EV/FY23 EBITDA, according to Fidessa consensus data compiled by Factset. It is trading below the multiples of Meridian and Mercury NZ at 19.52x and 14.65x EV/FY23 EBITDA respectively, while still higher than Genesis Energy that is trading at 9.59x EV/FY23 EBITDA.

Contact Energy has not mandated a defence advisor, CEO Mike Fuge said.  

Potential sale of thermal assets

Contact Energy is continuing the strategic review of its thermal assets with a goal to more than halve its carbon emissions by 2026, which includes closing its gas-powered Te Rapa asset by 2023 and extending its gas-fired Taranaki Combined Cycle (TCC) asset to 2024, according to the company’s FY22 results yesterday (15 August).

Meanwhile the company has received buyer interest from about three to five parties, although a sales process has not been run, Fuge said. The company could still consider a potential sale of these thermal assets, he added.

Back in 2017, this news service reported that Contact Energy could sell its gas-fired power plants and its gas storage facility in order to become a pure play renewables business. 

Partners for data centres

Contact Energy is also looking to work with partners on funding and construction of its data centres, the CEO said. Construction of its Lake Parime data centre is now underway, according to the FY22 results.

International Tier-1 companies like Microsoft [NASDAQ:MSFT] and Amazon’s [AMZN: NASDAQ] cloud computing services business Amazon Web Services (AWS) have announced programs to invest into New Zealand data centres, which will require renewable baseload electricity, the CFO said, adding that this aligns with Contact Energy’s geothermal baseload offering pipeline.

“We are aware of significant international players wanting to build their data centres in New Zealand because of the high renewable content of our electricity,” Devers said.

Renewable pipeline

Contact Energy has a “watching brief” on potential acquisition and divestment opportunities, but right now it does not see many opportunities in New Zealand given that its three largest competitors are government-owned, Fuge said.

The company has “enough on its plate” with its renewables pipeline to fund from its balance sheet, before it could look overseas, the CEO said. It announced it would invest NZD 300m in building a 51.4MW geothermal power project in Taupo, which is targeted to go onstream in Q4 2024, as announced yesterday.

The company could consider strategic partnerships to fund wind and solar projects, Devers said. It has also received interest in funding geothermal projects, although the company prefers not to reduce ownership of its renewables pipeline, he said.

Contact Energy has made strategic acquisitions and investments over the past 24 months, including the purchase of New Zealand-based specialist geothermal well service company Western Energy Services without disclosing the transaction value and its NZD 7.3m investment in Simply Energy to assume 100% ownership of the New Zealand-based electricity solutions business, Devers said. 

The Wellington-based company reported NZD 182m in net profit for FY22, down NZD 5m from the year before, while earnings before interest, taxes, depreciation, amortization and changes in fair value (EBITDAF) were NZD 537m, down 3% on the prior year.