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</h2>
GRiM Uplift — Sept/Oct 2019
Refining NZ (NZR) is having a tough finish to FY19, with the September/October 2019 gross refining margin (GRM) below average at US$6.16/barrel and November conditions deteriorating. Thus far, the low sulphur shipping fuel requirements are having the expected negative impact on high sulphur fuel oil spreads, but limited effect on diesel spreads. We have cut our FY19 NPAT forecast -$39m to $6m, our dividend forecast -5cps to 4cps and our target price -15cps to $2.00.<a target="_blank"></a>
What’s changed?
<ul>
<li>&nbsp;Earnings: FY19 NPAT -$39m lower to $6m, dividend -5cps lower to 4cps</li>
<li> Target Price: Cut -15cps to $2.00</li>
<li> Rating: NEUTRAL rating retained</li>
</ul>
Below average GRM and near record low uplift on Singapore
NZR’s Sept/Oct 2019 GRM was US$6.16/barrel, ~-US$2/barrel lower than our estimate. The uplift over the Singapore benchmark margin was only +US$2.61/barrel, ~-US$2/barrel lower than the last 18 months’ average and the lowest since Nov/Dec 2013 (excluding NZR maintenance outage periods). Impacting on NZR’s margin has been a decline in high sulphur fuel oil margins and rising crude freight rates. In addition, NZR has been building residue stock (a low value product) that will be used during NZR’s 2020 maintenance outage.
Near-term outlook not benefitting from IMO 2020 regulations
With only six weeks before low sulphur shipping fuel regulations (IMO 2020) come into force, the impact on refining margins have been negative. Whilst high sulphur fuel oil crack spreads have declined as expected, there has not (as yet) been a corresponding increase in diesel spreads. The Bloomberg Singapore benchmark margin has collapsed in recent weeks to new lows, averaging -US$0.80/barrel vs. a historic average of ~US$4.50/barrel.
In addition, a side effect of IMO 2020 has been increases in crude freight rates. NZR has indicated that crude freighter supply is down due to some ships being fitted with scrubbers (to meet IMO 2020 requirements) and some being used as storage for low sulphur fuel oil. NZR is indicating a ~-US$1/barrel impact on the Sept/Oct margin. The difference between crude oil and finished product freight rates is the driver of NZR’s locational benefit (it’s cheaper to import crude oil than finished product).
Solar farm gets go ahead
Late last month, NZR announced it is building a 26.7MW solar farm that will supply ~10% of NZR’s electricity needs. The construction cost is $37m and the build is 73% project financed. We estimate an equity IRR of ~12.5%, although the wholesale electricity price assumption is a key assumption.
Forecast changes – lower near-term forecasts
We have cut our FY19 NPAT forecast -$39m to $6m, highlighting the very high operating leverage in NZR. The processing fee revenue in Sept/Oct was lower than expected and November is looking lower. FY21 has a small uplift from the solar farm operation commencing.&nbsp;
<div class="content-highlight">
Investment View
Our rating is NEUTRAL. NZR’s near-term outlook is mixed with shipping fuel specification changes yet to see the expected benefits. In addition there are medium-term uncertainties, particularly demand risk as the global economy slows which may weigh on the GRM.&nbsp;
</div>
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185

Refining NZ
GRiM Uplift — Sept/Oct 2019
Refining NZ (NZR) is having a tough finish to FY19, with the September/October 2019 gross refining margin (GRM) below average at US$6.16/barrel and November conditions deteriorating. Thus far, the low sulphur shipping fuel requirements are having the expected negative impact on high sulphur fuel oil spreads, but limited effect on diesel spreads. We have cut our FY19 NPAT forecast -$39m to $6m, our dividend forecast -5cps to 4cps and our target price -15cps to $2.00.
What’s changed?

&nbsp;Earnings: FY19 NPAT -$39m lower to $6m, dividend -5cps lower to 4cps
 Target Price: Cut -15cps to $2.00
 Rating: NEUTRAL rating retained

Below average GRM and near record low uplift on Singapore
NZR’s Sept/Oct 2019 GRM was US$6.16/barrel, ~-US$2/barrel lower than our estimate. The uplift over the Singapore benchmark margin was only +US$2.61/barrel, ~-US$2/barrel lower than the last 18 months’ average and the lowest since Nov/Dec 2013 (excluding NZR maintenance outage periods). Impacting on NZR’s margin has been a decline in high sulphur fuel oil margins and rising crude freight rates. In addition, NZR has been building residue stock (a low value product) that will be used during NZR’s 2020 maintenance outage.
Near-term outlook not benefitting from IMO 2020 regulations
With only six weeks before low sulphur shipping fuel regulations (IMO 2020) come into force, the impact on refining margins have been negative. Whilst high sulphur fuel oil crack spreads have declined as expected, there has not (as yet) been a corresponding increase in diesel spreads. The Bloomberg Singapore benchmark margin has collapsed in recent weeks to new lows, averaging -US$0.80/barrel vs. a historic average of ~US$4.50/barrel.
In addition, a side effect of IMO 2020 has been increases in crude freight rates. NZR has indicated that crude freighter supply is down due to some ships being fitted with scrubbers (to meet IMO 2020 requirements) and some being used as storage for low sulphur fuel oil. NZR is indicating a ~-US$1/barrel impact on the Sept/Oct margin. The difference between crude oil and finished product freight rates is the driver of NZR’s locational benefit (it’s cheaper to import crude oil than finished product).
Solar farm gets go ahead
Late last month, NZR announced it is building a 26.7MW solar farm that will supply ~10% of NZR’s electricity needs. The construction cost is $37m and the build is 73% project financed. We estimate an equity IRR of ~12.5%, although the wholesale electricity price assumption is a key assumption.
Forecast changes – lower near-term forecasts
We have cut our FY19 NPAT forecast -$39m to $6m, highlighting the very high operating leverage in NZR. The processing fee revenue in Sept/Oct was lower than expected and November is looking lower. FY21 has a small uplift from the solar farm operation commencing.&nbsp;

Investment View
Our rating is NEUTRAL. NZR’s near-term outlook is mixed with shipping fuel specification changes yet to see the expected benefits. In addition there are medium-term uncertainties, particularly demand risk as the global economy slows which may weigh on the GRM.&nbsp;

Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185

Refining NZ: GRiM Uplift — Sept/Oct 2019