Even though the electricity sector as a whole is distinctly out of favour, one analyst is recommending investors buy Contact Energy shares.
Craigs Investment Partners head of institutional research Grant Swanepoel said political risks and potential demand shocks, such as if the Tiwai aluminium plant reduces its electricity usage, had dragged down the share prices of all stocks in the sector.
Meridian shares currently offered the best average return in the sector but Contact had less downside risk, making it his top pick, Mr Swanepoel said.
Contact was looking attractive in terms of its mix of generation because it has gas generation, gas storage, geothermal and hydro and it has the ability to cut back its gas generation from 2015.
If something like a Tiwai closure were to occur, Contact had the ability to remove some of its generation to be better sized for the industry, and the impact of the change would not be as detrimental as it could be for some of the other companies, he said.
If Labour became government and decided to favour hydro players, Contact's exposure to hydro power was similar to other players in the industry, Mr Swanepoel said.
The option for Tiwai to cut back from a 572 megawatt plant down to a 400 megawatt plant would be beneficial for Meridian and that would probably be from the fiscal year 2016 onwards.
The Electricity Authority's pricing review could also have a positive impact on Meridian's earnings in the full 2018 financial year, he said.
