Value Investment or Momentum Investment

by Gerald Chauma

Ticker Symbols:- Origin Energy Ltd (ASX: ORG) - $6.34, Meridian Energy Ltd (ASX: MEZ) - $3.54, Mercury NZ Ltd (ASX: MCY) -

The Genesis

The investment space has always offered a range of opportunities that seem to be endless in their potential for an upside. We, however, have to consider that every investment that has ‘potential’ has the inherent risk of being a loss maker in different circumstances.

Now, green energy investments or renewable energy investments according to Carbon Collective, refer to the allocation of financial resources into projects, companies, and technologies that generate power from renewable energy sources. The Australian Securities Exchange Ltd (ASX) however has a more ‘liberal’ definition of green energy investments, labelling them as a broad range of companies that form ASX renewable energy shares. From Origin Energy Ltd (ASX: ORG), which still sources the majority of its energy from fossil fuels, though its expanding into wind and solar, to Mercury NZ Ltd (ASX: MCY), a New Zealand-based company that already generates 100% of its energy from renewables.

The Environmental and Social Governance (ESG) drive which saw its prominence starting around 2004, after a consortium invited by the United Nations (UN), generated a report titled ‘Who Cares Wins’ which itemises that ESG is considered as ‘Impact Investing’. With a company’s primary objective being tagged under sustainability, companies that addressed that niche began to gain attention.

The Value Proposition...

There has always been a consensus on the VP of renewable energy companies. They address one of the critical negators of a sustainable and responsible environment whilst generating value for shareholders and still being profitable. Or are they? At least being scalable has always been the question posed by analysts alike whilst retaining profitability.

Let’s take a quick look at (ASX: ORG), which has a market cap of $10.7 billion and has the preeminent role of being a leading provider of electricity, natural gas, solar and LPG. Now we can obviously see that some of these product offerings aren’t necessarily ‘renewable energy’ sources but under the liberal definition of the (ASX), the company is considered a ‘green energy investment’ because of its growing capacity in renewable energy generation.

Most analysts believe in the business having the fundamentals to validate and justify the valuation. A smart play that has scalability, especially in its actual ‘renewable energy generation’ capacity, a rather lengthy runway. It had a profit making year ended June 2024 of only $918,855 despite their additional investment in Britain’s Octopus Energy, raising their stake to 23% with a further $363 million investment in the growing giant. (ASX: ORG) has a P/E ratio of 12.31 with a sector average of 11.83, being considered quite healthy. The dividend yield sits snugly at 5.53%, healthy enough based on the sector without habiting much risk. Not forgetting to mention that on its list of major shareholders are investors like J P Morgan Nominees Australia Pty Limited with a colossal 32.84% holding, HSBC Custody Nominees (Australia) Limited holding 26.80% and Citicorp Nominees Pty Limited with a more subtle 9.71%. Talk about institutional backing!

How about the golden boy, (ASX: MEZ) that holds the title of being New Zealand's largest energy producer, using 100% renewable sources. A market cap of $9.35 billion and at least being the only company in this article that actually sells its entire energy offering from renewable sources mainly from large hydroelectric schemes in the South Island and a range of diversified wind farms.

A rather tech-like P/E ratio of 35.86 but a more self-effacing dividend yield of 3.43%. It still is a very profitable company, having a net profit of $282 million year ending June 2024. Its value proposition will likely allow it to gain a bit more market share considering it already owns a third of it. But seeing its production relying heavily on hydroelectric schemes, scalability of this type of energy source is capital intensive which may rein future growth strategies to a more conservative approach. But don’t let this be a dampener, they do have similar institutional investors like our friends over at (ASX: ORG).

Authors of Momentum...

There has been a big push for ESG investing practices once they became more mainstream and billions were pumped into sectors that prioritised this corporate objective. With institutional investors, venture capitalist’s, and government subsidies being granted for this type of investment, companies went all out. Fanned by a low interest rate environment that we had between 2009 - 2016, deemed the era of ‘free money’, proliferation of companies with this strategic objective in multiple sectors popped up.

Now, here at Naison Hardy Capital, we believe this is not a momentum investment play. It harbours a ‘hybrid’ model type of investing that is both value and impact after considerable analysis. But in terms of its trajectory, well, with interest rates having gone up and free money drying up a bit and the need to still grow the sector for it to meet demand, which it hasn’t, the momentum train has left the terminal. It still remains a very expensive sector with lots of potential for ‘very very very long plays’.