Contact Energy's shock almost 25% profit downgrade this week - which wiped more than $400 million off its market capitalisation - has had its profit outlook further downgraded by brokers and its target price revised.
A combination of a loss incurred buying power for South Island consumption last August, estimated to have cost up to $50 million, and a 25% hike in its gas contracts prompted Contact to issue a 23% profit downgrade, equating to a loss up to $53.5 million and reducing forecast profits to $179.2 million.
Brokers ABN Amro Craigs yesterday issued a three-year profit downgrading, forecasting Contact's adjusted profit for 2009 to fall 24.3%, or $54.5 million.
During 2010, it was forecast to fall 22% or $47.4 million, with a drop of 23.3%, or $49.7 million, forecast for 2011.
Contact's share price plummeted almost 10% on Tuesday, wiping out more than $400 million in market capitalisation before retracing about 1.5% to trade around $6.70 yesterday.
ABN retained a buy recommendation on the defensive stock but had revised its 12-month target price down from $9.46 to $9.08, broker Peter McIntyre said.
"The quantum of the negative guidance provided has taken us by surprise. Management must increasingly focus on the wholesale market volatility, given the current operating constraints [diminished transmission across Cook Strait] as these look likely to continue for at least the next five years," he said.
Similarly, brokers Forsyth Barr downgraded its forecasts, in line with Contact's downgrade, with the valuation falling from $10.06 to $9.59 and the stock recommendation going from buy to accumulate, broker Suzanne Kinnaird said.
"While we still like Contact's long-term story, we expect near-term reported earnings growth to be modest. The risk of earnings volatility remains high," Ms Kinnaird said.
Exacerbating the impact of falling wholesale electricity prices is Contact's "shrinking customer base", a result of its ill-timed September price hike and directors' fees announcements, which led to thousands of customers switching from Contact to other suppliers.
"Contact has now lost 19,000 customers since the end of September last year, which is over 3.5% of its retail base," Ms Kinnaird said.
Mr McIntyre said Contact was considering going to the market to raise debt to partly fund some of a $3 billion proposal to increase generating capacity.
Ms Kinnaird's and Mr McIntyre's financial disclosure documents are available on request.
