Tapping New Zealand's Breezes

New Zealand has a budding romance with wind energy.  In a country that is already heavily reliant on renewable energy sources such as hydropower and geothermal energy, the development may be significant.   The island country built up nearly 700 megawatts of installed wind power capacity that supply about 6% of the country’s energy needs.  According to the New Zealand Wind Energy Association, there are 19 wind farms operating in the land of kiwis. 

NZ Windfarms Ltd. (NWF:  NZ) is the operator of the Te Rere Hau wind farm in near Palmerston North.  There are 92 turbines operating on the farm with a 46 megawatt capacity.  Power is sold to the New Zealand national grid that is operated by a state-owned enterprise called Transpower New Zealand.

The company is taking advantage of wind conditions particularly favorable to wind power generation.  New Zealand’s prevailing winds come from the west.  Even more extreme and potentially more volatile westerlies can be experienced to the south. To the north along the equator the winds blow from the easterly or south-easterly direction.  Thus New Zealand sits conveniently in a low pressure depression that is characterized by the moderate winds that are most favorable for consistent and reliable wind turbine operation.  Turbine blades and mechanisms can be stressed or even damaged if winds are too fast.

The wind industry has been aided by strong government support for wind energy.  Renewables currently provide about 86% of New Zealand’s power requirements and the National Power Scheme calls for an expansion to 90% by 2025 and 100% by 2035.  After a lull in installations in up through 2019, there has been a build-up in planned wind power projects.  By the end of 2020, there were 2,500 megawatts of wind projected consented in the country.  The pipeline implies high single digit growth rates for the sector over the next five years.    

Although a small company NZ Windfarms is a power house of performance -  no pun intended. In the twelve months ending December 2020, NZ Windfarms reported NZ$10.7 million (US$7.7 million) in total sales providing NZ$1.5 million (US$1.1 million) in net income.  The accomplishment delivered a 3.7% return on equity to shareholders.  More importantly, 56% of sales were converted to operation cash flow, providing the company with investment capital.  NZ Windfarms had NZ$2.6 million (US$1.9 million) in cash on its balance sheet at the end of December 2020.  That left approximately NZ$7.1 million (US$5.1 million) in net debt on the company’s balance sheet.

For U.S.-based investors due diligence is largely the same as for any U.S. company.  The stock is a bit pricey with a multiple of 47 times trailing earnings.  The premium pricing could be worth the trouble given the 6.3% forward dividend yield on the shares.  Before getting carried away by the dazzling figure investors should also consider that currency issues can provide some added costs. 

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.