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>
Jettisoned into the Unknown
UNDERPERFORM
Refining NZ (NZR) has announced it is undertaking a wide-ranging Strategic Review and is not ruling out any options. The material drop in fuel volumes and in particular jet fuel is causing operational and financial headaches for NZR's customers. Whilst NZR will consider all options, the backstop option is converting into an import terminal. We believe there is good value in NZR's infrastructure, but closing the refinery will not be cheap. Given NZR's highly uncertain outlook, and the risk of a negative value outcome for shareholders, our rating is lowered to UNDERPERFORM and our target price cut -45cps to $0.95.
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Strategic Review highlights&nbsp;NZR&nbsp;faces some huge challenges
COVID-19 has brought to a head some of the strategic issues facing NZR. The refining portion of the business has struggled in recent times, with the collapse in jet fuel demand the latest challenge. The short time frame (~two months) to arrive at initial findings is very quick given NZR's complex customer relationships, position in fuel supply chain and general uncertainty in the fuel market. The short timetable points to a strong sense of urgency, which we expect is coming from NZR's customers given they are currently financing through the fee floor an operation that would otherwise be losing significant cashflows.
All options open, but the backstop is converting to an import terminal
NZR is open to all options, including the status quo (with significant operational improvements, over and above the material capex reductions identified in its 2018/19 capex review). Other options to be canvassed include structural separation of the refining and infrastructure assets, and relooking at the processing fee arrangements (or all of the above). The backstop option for NZR is converting to an import terminal serving the Auckland market. Closing the Marsden operations completely is not feasible.
Government and customer stakeholders will be critical to the outcome
The current processing fee arrangements are not working for NZR's customers. They are currently at a significant competitive disadvantage to Gull and we suspect are pushing for change. We estimate the fee floor is effectively US$5.8/barrel, vs. the US$1.0/barrel GRM reported for the January/February 2020 period.&nbsp; The Government will also be a critical player given NZR's role in New Zealand's fuel supply chain and it will be wanting to ensure any final option ensures a secure fuel supply.
Value unknown, but it could be low and we prefer more certain investments — downgrading to&nbsp;UNDERPERFORM
At worst, we believe there is significant&nbsp;value in&nbsp;NZR's&nbsp;infrastructure assets.&nbsp;However, the question is how much will it cost to unlock that&nbsp;value? The backstop option of converting to an import terminal will be costly.&nbsp;NZR's&nbsp;future and therefore its future value is very uncertain at this stage. We prefer investments with greater certainty&nbsp;in the current environment.
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185

Refining NZ
Jettisoned into the Unknown
UNDERPERFORM
Refining NZ (NZR) has announced it is undertaking a wide-ranging Strategic Review and is not ruling out any options. The material drop in fuel volumes and in particular jet fuel is causing operational and financial headaches for NZR's customers. Whilst NZR will consider all options, the backstop option is converting into an import terminal. We believe there is good value in NZR's infrastructure, but closing the refinery will not be cheap. Given NZR's highly uncertain outlook, and the risk of a negative value outcome for shareholders, our rating is lowered to UNDERPERFORM and our target price cut -45cps to $0.95.

Strategic Review highlights&nbsp;NZR&nbsp;faces some huge challenges
COVID-19 has brought to a head some of the strategic issues facing NZR. The refining portion of the business has struggled in recent times, with the collapse in jet fuel demand the latest challenge. The short time frame (~two months) to arrive at initial findings is very quick given NZR's complex customer relationships, position in fuel supply chain and general uncertainty in the fuel market. The short timetable points to a strong sense of urgency, which we expect is coming from NZR's customers given they are currently financing through the fee floor an operation that would otherwise be losing significant cashflows.
All options open, but the backstop is converting to an import terminal
NZR is open to all options, including the status quo (with significant operational improvements, over and above the material capex reductions identified in its 2018/19 capex review). Other options to be canvassed include structural separation of the refining and infrastructure assets, and relooking at the processing fee arrangements (or all of the above). The backstop option for NZR is converting to an import terminal serving the Auckland market. Closing the Marsden operations completely is not feasible.
Government and customer stakeholders will be critical to the outcome
The current processing fee arrangements are not working for NZR's customers. They are currently at a significant competitive disadvantage to Gull and we suspect are pushing for change. We estimate the fee floor is effectively US$5.8/barrel, vs. the US$1.0/barrel GRM reported for the January/February 2020 period.&nbsp; The Government will also be a critical player given NZR's role in New Zealand's fuel supply chain and it will be wanting to ensure any final option ensures a secure fuel supply.
Value unknown, but it could be low and we prefer more certain investments — downgrading to&nbsp;UNDERPERFORM
At worst, we believe there is significant&nbsp;value in&nbsp;NZR's&nbsp;infrastructure assets.&nbsp;However, the question is how much will it cost to unlock that&nbsp;value? The backstop option of converting to an import terminal will be costly.&nbsp;NZR's&nbsp;future and therefore its future value is very uncertain at this stage. We prefer investments with greater certainty&nbsp;in the current environment.
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185


Channel Infrastructure NZ Ltd

Refining NZ: Jettisoned into the Unknown