Stock surges as Contact cuts plan
Shareholders set to benefit from $367m dividend after about-face
Contact Energy investors are applauding the company’s decision to shelve an unpopular overseas geothermal investment plan and instead boost cash returns to shareholders, including a $367 million special dividend next month.
The electricity firm also flagged the potential for additional capital distributions, probably through share buy-backs, which a fund manager said could be worth as much as $100 million annually.
Contact shares rallied, closing up 11.4 per cent at $6.18 last night, adding more than $460 million to the firm’s market value.
The company faced a share-price slump and a backlash from institutional investors after revealing in February that it was considering investing free cash-flow in geothermal projects around the Pacific’s “ring of fire”.
The announcement came as a surprise to shareholders, who had been expecting a capital return instead.
Yesterday, Contact said that no “material investment opportunities” were available that would sufficiently reward shareholders, meaning capital requirements would be limited in the near-term and dividends would increase.
Contact has amended its ordinary dividend policy to pay out roughly 100 per cent of underlying earnings after tax, up from 80 per cent previously. Shareholders will receive a fully-imputed special dividend of 50c per share on June 23.
Nikko Asset Management senior portfolio manager James Lindsay said overseas geothermal investments would have significantly increased Contact’s risk-profile and his firm had expressed its concerns to the board and management.
“We didn’t think it was in our best interests as shareholders,” Lindsay said. “Clearly they’ve recognised that . . . it’s exceptional news.”
He said the share buy-backs had the potential to be “quite material”.
“There could be up to $100 million worth of buy-backs per annum,” Lindsay said.
Salt Funds Management managing director Paul Harrison commended Contact for listening to investors’ concerns.
“It’s great to see that they have taken on board what the market was telling them,” Harrison said.
Rival electricity firm Mighty River Power’s mixed success in overseas geothermal ventures — it exited investments in Chile and Germany last year — had been adding to concerns about Contact’s plans in that space.
There was also market speculation that Contact’s majority shareholder, Australia’s Origin Energy, had been exerting its influence to push the geothermal strategy.
However, Harbour Asset Management managing director Andrew Bascand said that wasn’t the case.
“In a public statement at a forum in Sydney the chief executive of Origin clearly said to 400 delegates that [overseas investments by Contact] were not something they were keen on at all,” Bascand said.
He said a foreign geothermal project would have been challenging for Contact to pull off.
Contact chief executive Dennis Barnes said the firm had strong capabilities in renewable energy and would continue to assess how those skills could be leveraged.