Contact Energy has ditched an unpopular option to invest in Pacific Rim geothermal power, instead opting to deliver shareholders a US$367 million special dividend.
Contact’s share price rocketed off its Friday close of US$5.50 to initially trade up 80c to US$6.35. The shares finished the day at US$6.22.
In mid-February, Contact took its shareholders and the market by surprise, announcing it was looking to invest US$1 billion, generated over five to eight years, in Pacific Rim geothermal markets, a sector where its major shareholder, Australian company Origin Energy, has Indonesian geothermal interests.
Analysts at the time correctly predicted a shareholder backlash.
Its share price subsequently slid 12% from US$6.30 to a low of US$5.52.
Contact chief executive Dennis Barnes said yesterday that after considering offshore investment, there were ”no material investment opportunities available” which could reward shareholders but Contact could support increased distributions to shareholders.
A fully imputed special dividend of 50c per share would be paid on June 23.
Following the announcement, international ratings agency Standard & Poor’s yesterday reaffirmed Contact’s credit rating, at BBB and outlook stable, saying its decision to concentrate on the New Zealand market removed ”some uncertainty” from Contact’s business risk profile.
Forsyth Barr broker Andrew Rooney said the decision was ”positive in two ways” for shareholders.
”First, it means Contact has seen sense. Investors had given Contact a clear message they weren’t impressed with the idea of international geothermal and were highly sceptical any opportunities existed,” he said.
And secondly, it appeared that Contact was driving the international geothermal decision, not Origin Energy, Mr Rooney said.
Craigs Investment Partners broker Peter McIntyre said while the dividend was a ”significant payout” for Contact, it was expected to have strong cashflows in the coming three years.
On the question of debt levels, Mr McIntyre said net debt stood at US$1.28 billion, but he forecast it to fall almost 30%, to US$905 million by 2017.
Contact also announced a revised dividend policy of 100% of underlying after-tax profit.
Mr McIntyre said the new dividend policy had given the market ”a massive amount of confidence”.
Mr Rooney said based on Forsyth Barr forecasts, that equated to a payout ratio of 65% to 70%, which is well below the other electricity generator-retailers’ range of 75% to 90%.
”Contact has indicated that surplus cash is still likely to be returned to shareholders, most likely via buybacks,” he said.
The new dividend policy implied a lower dividend than Forsyth Barr’s current forecast, meaning the buybacks could be ”materially large”; around US$100 million a year, or 13c per share.
Standard & Poor’s credit analyst Thomas Jacquot said the affirmation indicated Contact’s forecast financial performance over the medium term would remain within expectations for a BBB rating.
That was despite Contact’s special dividend being largely debt-funded, the potential for higher shareholder return in the future, with increased dividend payout and potential share buybacks, he said.
Mr Rooney said while the capital management news was positive operationally, Contact’s earnings before interest, tax, depreciation, amortisation and financial instruments was US$49 million behind a year ago.
Contact needed to match its May and June 2014 performances, which were both strong months, but risks remained to the down side operationally, Mr Rooney said. – Odt.co.nz