Contact’s share price tumbled in June due to the introduction of the “What’s My Number” advertising campaign and managements indication that market earnings expectations were too high. The NZX50 Gross index fell 2.8% over the month compared to Contact’s 11.3% fall.
At the end of May the Electricity Authority began an advertising campaign directing electricity consumers to the What’s My Number website where they can calculate the savings possible by switching to the cheapest electricity retailer for their suburb. So far 221,540 calculations have been made identifying $37.0m of potential savings for consumers. Contact, whose residential tariffs are approximately 11% higher than the market average, is likely to be a casualty of this campaign as its customers switch to the cheaper retailers. Contact lost 2,100 of its 470,000 customers in April and it is likely that this number will be higher in June and remain at elevated levels for the rest of the year.
The NZ electricity market is suffering from low wholesale electricity prices due to large amounts of new generation coming online before the global financial crisis and low demand as our economy recovers from recession. When NZ’s economy eventually recovers Contact will have strong earnings growth as wholesale electricity prices increase and its costs lag the revenue growth. Contact’s costs will lag as they have substantial amounts of renewable hydro and geothermal generation which will not suffer production cost rises as the economy grows. However this recovery in NZ wholesale electricity prices appears far away and the current low prices are putting pressure on Contact’s earnings which resulted in management signalling that market earnings expectations were too high during a recent investor briefing.
For the past two years Contact’s share price has bounced between $5.49 and $6.40. Contact continues to face some headwinds with pressure on customer numbers, low electricity prices and the expected privatisation of SOE’s.