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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Channel Infrastructure NZ Ltd / Equity Bottom-Up

<h2><a target="_blank">The Good Oil</a></h2>
Refining Margin<a target="_blank"></a>s Sink — Dec 2019
November 2019 has not panned out as expected for refining margins. Instead of increasing, with higher diesel demand more than offsetting a falling sulphur fuel oil demand, both crack spreads have dropped ~-US$4/barrel and ~-US$9/barrel respectively in November 2019. We estimate that the November 2019 Refining NZ (NZR) gross refining margin (GRM) was US$5.99/barrel and the spot margin is a little above US$5.00/barrel. This has had a material negative flow-on effect to NZR’s FY19 earnings outlook and a modest impact on ZEL’s FY20 earnings.
GRM continues to fall on the back of IMO 2020 regulations
We estimate that NZR’s GRM for November 2019 was US$5.99/barrel, down -US$2.37/barrel from October. The fuel oil crack spread had the largest absolute drop, falling -US$8.20/barrel, jet fuel and diesel crack spreads also declined steeply, down ~-20% and ~-22% respectively. The large decline in fuel oil continues as a result of the low sulphur regulations due to come in in 2020. NZR has reported that its GRM for Sept/Oct 2019 was US$6.16/barrel giving it a low +US$2.16/barrel uplift over the Singapore benchmark margin. We cut our FY19 NPAT forecast -$39m to $6m, highlighting the operating leverage in the business.
Refining NZ (NZR) has indicated that NPAT will be reduced by between NZ$1.5M and NZ$2.5M as a result of the power outage in Northland on 27 November. NZR had to completely power down for safety reasons with business critical systems maintained using back up power.
MBIE importer margins up again in November
MBIE provisional importer margins for November show diesel and petrol margins up +6% and +10% respectively. This makes it four consecutive months of month on month growth for diesel importer margins and three months of growth for petrol importer margins. These increases contradict the anecdotal evidence that retail competition continues to be tough.
ComCom final report looms in front of ZEL
On Thursday 5 December, the ComCom will be releasing its final Retail Market Fuel Study.&nbsp;We believe it is likely to walk back from some of its draft statements, with retail fuel market competition intensifying in the past few months. Our understanding is that retail competition remains tough and hence ZEL’s earnings remain under pressure. In addition, the low refining margins are causing additional margin pressures for ZEL such that we have trimmed our FY20 EBITDAF forecast -$7m to $389m (slightly below guidance).
Figure 1. Summary company valuation metrics
<table class="table table-striped">
<thead>
<tr>
<td style="width: 38.75pt;">
&nbsp;
</td>
<td style="width: 38.8pt;"></td>
<td style="width: 32.45pt;">
Target
</td>
<td style="width: 38.85pt;">
Target
</td>
<td style="width: 42.5pt;"></td>
<td colspan="3" style="width: 110.25pt;">
1 year forward
</td>
</tr>
</thead>
<tbody>
<tr>
<td style="width: 38.75pt;">
Company
</td>
<td style="width: 38.8pt;">
Price
</td>
<td style="width: 32.45pt;">
Price
</td>
<td style="width: 38.85pt;">
Return
</td>
<td style="width: 42.5pt;">
Rating
</td>
<td style="width: 50.6pt;">
EV/EBITDA (x)
</td>
<td style="width: 23.55pt;">
PE (x)
</td>
<td style="width: 36.1pt;">
Gr Yld (%)
</td>
</tr>
<tr>
<td style="width: 38.75pt;">
NZR
</td>
<td style="width: 38.8pt;">
1.97
</td>
<td style="width: 32.45pt;">
2.00
</td>
<td style="width: 38.85pt;">
7.6%
</td>
<td style="width: 42.5pt;">
NEUTRAL
</td>
<td style="width: 50.6pt;">
7.0
</td>
<td style="width: 23.55pt;">
&gt;100
</td>
<td style="width: 36.1pt;">
2.8
</td>
</tr>
<tr>
<td style="width: 38.75pt;">
ZEL
</td>
<td style="width: 38.8pt;">
5.14
</td>
<td style="width: 32.45pt;">
5.11
</td>
<td style="width: 38.85pt;">
8.8%
</td>
<td style="width: 42.5pt;">
NEUTRAL
</td>
<td style="width: 50.6pt;">
7.5
</td>
<td style="width: 23.55pt;">
13.8
</td>
<td style="width: 36.1pt;">
13.0
</td>
</tr>
</tbody>
</table>
Source: Forsyth Barr analysis
<div class="content-highlight">
Investment View
We have NEUTRAL ratings on both NZR and ZEL. Whilst there are positive upside scenarios, both stocks also face challenges. ZEL has difficult trading conditions and its underlying earnings level is unclear. NZR’s challenge is to control opex and capex to ensure it remains competitive with import options. In addition, the GRM outlook is negative.<a target="_blank">&nbsp;</a>
</div>
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185

The Good Oil
Refining Margins Sink — Dec 2019
November 2019 has not panned out as expected for refining margins. Instead of increasing, with higher diesel demand more than offsetting a falling sulphur fuel oil demand, both crack spreads have dropped ~-US$4/barrel and ~-US$9/barrel respectively in November 2019. We estimate that the November 2019 Refining NZ (NZR) gross refining margin (GRM) was US$5.99/barrel and the spot margin is a little above US$5.00/barrel. This has had a material negative flow-on effect to NZR’s FY19 earnings outlook and a modest impact on ZEL’s FY20 earnings.
GRM continues to fall on the back of IMO 2020 regulations
We estimate that NZR’s GRM for November 2019 was US$5.99/barrel, down -US$2.37/barrel from October. The fuel oil crack spread had the largest absolute drop, falling -US$8.20/barrel, jet fuel and diesel crack spreads also declined steeply, down ~-20% and ~-22% respectively. The large decline in fuel oil continues as a result of the low sulphur regulations due to come in in 2020. NZR has reported that its GRM for Sept/Oct 2019 was US$6.16/barrel giving it a low +US$2.16/barrel uplift over the Singapore benchmark margin. We cut our FY19 NPAT forecast -$39m to $6m, highlighting the operating leverage in the business.
Refining NZ (NZR) has indicated that NPAT will be reduced by between NZ$1.5M and NZ$2.5M as a result of the power outage in Northland on 27 November. NZR had to completely power down for safety reasons with business critical systems maintained using back up power.
MBIE importer margins up again in November
MBIE provisional importer margins for November show diesel and petrol margins up +6% and +10% respectively. This makes it four consecutive months of month on month growth for diesel importer margins and three months of growth for petrol importer margins. These increases contradict the anecdotal evidence that retail competition continues to be tough.
ComCom final report looms in front of ZEL
On Thursday 5 December, the ComCom will be releasing its final Retail Market Fuel Study.&nbsp;We believe it is likely to walk back from some of its draft statements, with retail fuel market competition intensifying in the past few months. Our understanding is that retail competition remains tough and hence ZEL’s earnings remain under pressure. In addition, the low refining margins are causing additional margin pressures for ZEL such that we have trimmed our FY20 EBITDAF forecast -$7m to $389m (slightly below guidance).
Figure 1. Summary company valuation metrics




&nbsp;



Target


Target



1 year forward






Company


Price


Price


Return


Rating


EV/EBITDA (x)


PE (x)


Gr Yld (%)




NZR


1.97


2.00


7.6%


NEUTRAL


7.0


&gt;100


2.8




ZEL


5.14


5.11


8.8%


NEUTRAL


7.5


13.8


13.0




Source: Forsyth Barr analysis

Investment View
We have NEUTRAL ratings on both NZR and ZEL. Whilst there are positive upside scenarios, both stocks also face challenges. ZEL has difficult trading conditions and its underlying earnings level is unclear. NZR’s challenge is to control opex and capex to ensure it remains competitive with import options. In addition, the GRM outlook is negative.&nbsp;

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

The Good Oil: Refining Margins Sink — Dec 2019