21 Oct 2013

Meridian shares offer 'stable long-term investment'

7:29 am on 21 October 2013

The Meridian Energy float has raised warnings about the effect on an overvalued, energy heavy sharemarket, but the former head of Tower Investments thinks it is a good long-term investment.

The offer for shares in Meridian Energy closed on Friday and the final price of the shares will be known after the book building process is completed on Wednesday evening.

It is expected to be between $1.50 and $1.80 a share, with the price for ordinary investors capped at $1.60.

Tower Investments was bought out by rival Fisher Funds for $79 million earlier this year.

The former chief executive of Tower Investments, which was bought out by Fisher Funds earlier this year, says the attractiveness of the offer depends on how long the investor wants to hold Meridian shares.

Sam Stubbs says it's difficult for short-term investors to know what the markets will do in terms of prices, but from the long-term perspective, particularly for investors interested in stable, yielding companies, the offer has a lot of attractions.

He says Meridian is the lowest cost producer of power in New Zealand, which is a key long-term advantage for the company.

The Government is a minority shareholder, and Mr Stubbs says it will not want the company to do anything too reckless with its balance sheet or investors, which means it will be a stable producer of income over time. From an investor's point of view, the Government is a motivated seller, wants the deal to go well and appears to be pricing it accordingly.

Mr Stubbs says there is also a very high initial yield on the stock because of the way the Government has structured the deal.

He says in terms of the short-term pricing the market will efficiently price in the risks and in this case that includes some unknown political risks.

"So particularly from a long-term income point of view or for someone who wants a stable, reliable stock that's got serious long-term competitive advantages it does look very good."

Mr Stubbs says for a long time Telecom dominated the New Zealand stockmarket, but now there will be a swing towards power companies.

He says it's difficult to imagine that the New Zealand stockmarket will ever be big enough or broad enough that it will be truly diversified in the way global markets are.