New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Channel Infrastructure NZ Ltd / Equity Bottom-Up

<h2>Refining NZ<br>Channel Check Shows all is on Track — FY21</h2>
<div></div>
<p><strong>OUTPERFORM</strong></p>
<p>Refining&nbsp;NZ's&nbsp;(NZR)&nbsp;FY21 result, its last as a refinery, was predictably&nbsp;overshadowed by an update on its imminent transition to Channel Infrastructure, with the company reaffirming that it is tracking to schedule and within the guided&nbsp;cost range. FY21&nbsp;EBITDA of NZ$73m was +NZ$2m ahead of our forecast and +NZ$23m up on FY20, despite NZR again operating at the fee floor. The EBITDA uplift was aided by an -NZ$34m reduction in operating costs due to NZR running the simplified refinery, allowing it to continue to operate&nbsp;on a cash neutral basis throughout FY21. NZR also confirmed new private storage agreements, though the quantum was less than both the size of the opportunity NZR indicated at its November 2021 capital raise. While our spot DCF is pulled back marginally due to this as well as the implementation of recent WACC changes, we continue to see value at current levels and maintain our OUTPERFORM rating.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/259/217/original/image_74986958331645664620809.png?1645664622" class="editor-image img-responsive" data-smartkarma-image-id="259217"></figure>
<div>
<h3>What's changed?&nbsp;</h3>
</div>
<div id="m_2846979936730615364iwrmo3">
<ul>
<li><strong>Earnings</strong>:&nbsp;FY22/FY23/FY24 EBITDAF tweaked +NZ$1m/-NZ$2m/-NZ$2m to NZ$78m/NZ$83m/NZ$88m</li>
<li><strong>Dividends</strong>:&nbsp;We now forecast&nbsp;a dividend of 3.5cps in FY22, resuming dividends six months earlier than&nbsp;previous&nbsp;forecasts</li>
</ul>
</div>
<div>
<h3>Conversion remains on track, costs sliding towards upper end of guidance&nbsp;range,&nbsp;1Q22 processing fees tracking above fee floor</h3>
</div>
<div>
<p>NZR's&nbsp;conversion to a fuel import terminal is on track to take place&nbsp;on 1 April 2022, with refinery operations to wind down from mid-March. COVID-19&nbsp;disruption is&nbsp;an ongoing&nbsp;risk and whilst there are some conversion cost pressures NZR&nbsp;still expects them to be within the existing range of NZ$200m to&nbsp;NZ$220m. Additional cost timing guidance has brought forward cost expectations in FY22 from later periods impacting&nbsp;our DCF value.</p>
<p>In its final quarter as a refinery, 1Q22 processing fees are tracking +NZ$5m to +NZ$10m above the NZ$37m fee floor. Import terminal fees&nbsp;commence&nbsp;on 1 April 2022 and are forecast to be ~NZ$75m in FY22 and&nbsp;operating costs (excluding costs related to the conversion)&nbsp;~NZ$70m for the year. This guidance was consistant with expectations, such that our FY22 forecast&nbsp;changes are minor.</p>
</div>
<div>
<h3>Quantum of new storage contracts announced less than forecast</h3>
</div>
<div id="m_2846979936730615364i6ucz">
<p>NZR private storage agreements now total 100mL, in addition to 180mL of shared terminal capacity. In total the finalised private storage contracts covering the first 10 years NZR operates as an import terminal are forecast to provide +$9m annually (real), -$2m lower than NZR indicated in November 2021 and our expectation. That has impacted FY23 and beyond forecasts. NZR is working on securing the additional private storage contracts, however, there now appears a degree of uncertainty. Other key areas of focus for FY22 are 1) following up the potential signing of 50–70mL of additional storage should the Government follow through on its proposal to require fuel retailers to hold increased inventory levels, and 2) make a decision on its Maranga Ra solar farm project. Electricity makes up ~1/3 of Channel Infrastructure's forecast cost base, and the aim of solar is to lower NZR's electricity cost.</p>
</div>

Refining NZ Channel Check Shows all is on Track — FY21

OUTPERFORM
Refining&nbsp;NZ's&nbsp;(NZR)&nbsp;FY21 result, its last as a refinery, was predictably&nbsp;overshadowed by an update on its imminent transition to Channel Infrastructure, with the company reaffirming that it is tracking to schedule and within the guided&nbsp;cost range. FY21&nbsp;EBITDA of NZ$73m was +NZ$2m ahead of our forecast and +NZ$23m up on FY20, despite NZR again operating at the fee floor. The EBITDA uplift was aided by an -NZ$34m reduction in operating costs due to NZR running the simplified refinery, allowing it to continue to operate&nbsp;on a cash neutral basis throughout FY21. NZR also confirmed new private storage agreements, though the quantum was less than both the size of the opportunity NZR indicated at its November 2021 capital raise. While our spot DCF is pulled back marginally due to this as well as the implementation of recent WACC changes, we continue to see value at current levels and maintain our OUTPERFORM rating.


What's changed?&nbsp;



Earnings:&nbsp;FY22/FY23/FY24 EBITDAF tweaked +NZ$1m/-NZ$2m/-NZ$2m to NZ$78m/NZ$83m/NZ$88m
Dividends:&nbsp;We now forecast&nbsp;a dividend of 3.5cps in FY22, resuming dividends six months earlier than&nbsp;previous&nbsp;forecasts



Conversion remains on track, costs sliding towards upper end of guidance&nbsp;range,&nbsp;1Q22 processing fees tracking above fee floor


NZR's&nbsp;conversion to a fuel import terminal is on track to take place&nbsp;on 1 April 2022, with refinery operations to wind down from mid-March. COVID-19&nbsp;disruption is&nbsp;an ongoing&nbsp;risk and whilst there are some conversion cost pressures NZR&nbsp;still expects them to be within the existing range of NZ$200m to&nbsp;NZ$220m. Additional cost timing guidance has brought forward cost expectations in FY22 from later periods impacting&nbsp;our DCF value.
In its final quarter as a refinery, 1Q22 processing fees are tracking +NZ$5m to +NZ$10m above the NZ$37m fee floor. Import terminal fees&nbsp;commence&nbsp;on 1 April 2022 and are forecast to be ~NZ$75m in FY22 and&nbsp;operating costs (excluding costs related to the conversion)&nbsp;~NZ$70m for the year. This guidance was consistant with expectations, such that our FY22 forecast&nbsp;changes are minor.


Quantum of new storage contracts announced less than forecast


NZR private storage agreements now total 100mL, in addition to 180mL of shared terminal capacity. In total the finalised private storage contracts covering the first 10 years NZR operates as an import terminal are forecast to provide +$9m annually (real), -$2m lower than NZR indicated in November 2021 and our expectation. That has impacted FY23 and beyond forecasts. NZR is working on securing the additional private storage contracts, however, there now appears a degree of uncertainty. Other key areas of focus for FY22 are 1) following up the potential signing of 50–70mL of additional storage should the Government follow through on its proposal to require fuel retailers to hold increased inventory levels, and 2) make a decision on its Maranga Ra solar farm project. Electricity makes up ~1/3 of Channel Infrastructure's forecast cost base, and the aim of solar is to lower NZR's electricity cost.


Refining NZ: Channel Check Shows All Is on Track — FY21