New Zealand Professional Investment Services Firm

Forsyth Barr

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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>The Good Oil</h2>
September 2019 — Improved GRM Outlook
August 2019 proved to be a positive month for Refining NZ (NZR) despite reporting a soft, albeit expected 1H19 result. We estimate NZR’s August 2019 gross refining margin (GRM) increased +3% from July’s estimate but most importantly our estimated GRM remains well above supressed levels recorded earlier in the year. Vehicle traffic growth remains positive on a 12-month rolling basis but growth continues to decline for light vehicle traffic while heavy vehicle traffic growth has flat-lined.
Refining margins remain healthy
We estimate NZR’s August 2019 GRM was US$8.06/barrel, increasing +3% on our previous month’s estimate. More importantly, NZR’s GRM remains well above the suppressed levels reported earlier in the year of below ~US$5.50/barrel. We estimate NZR’s GRM for the May/June bi-monthly period will be US$7.92/barrel with a processing fee of NZ$59.9m. NZR will release its GRM for the July/August period in September 2019.
NZR released a soft 1H19 result as expected with 1H19 NPAT of -NZ$4m. However, the outlook is more positive with the shipping sector getting closer to implementing Marpol, and NZR guiding to lower capex than anticipated. We have increased our target price +33cps to $2.15 and upgraded our rating to NEUTRAL.&nbsp;Capitalising Lower Capex&nbsp;(22/08/19) should be viewed for more information.
Light vehicle traffic growth continues to slow
Heavy vehicle traffic data increased strongly in July, up +5.1% on the pcp after a soft June. Light vehicle traffic also increased on the pcp but not quite as strongly, up +1.0%. On a 12-month rolling basis heavy vehicle traffic has flat-lined at +2.4% while light vehicle traffic growth also remains positive at +2.1%, but growth has been trending downwards for 15-months.
Provisional importer margins trend in opposite directions
Provisional petrol importer margins trended strongly upwards in August 2019 while diesel importer margins declined slightly. Diesel importer margins decreased -1% in August to average 32.6cpl, inline with margins in the pcp. Petrol importer margins increased +10% on the previous month to average 29.3cpl in August, rebounding from a soft prior month.
Figure 1. Summary company valuation metrics
<table class="table table-striped">
<thead>
<tr>
<td></td>
<td></td>
<td>
Target
</td>
<td>
Target
</td>
<td></td>
<td colspan="3">
1 year forward
</td>
</tr>
</thead>
<tbody>
<tr>
<td>
Company
</td>
<td>
Price
</td>
<td>
Price
</td>
<td>
Return
</td>
<td>
Rating
</td>
<td>
EV/EBITDA (x)
</td>
<td>
PE (x)
</td>
<td>
Gr Yld
</td>
</tr>
<tr>
<td>
NZR
</td>
<td>
2.05
</td>
<td>
2.15
</td>
<td>
10.2%
</td>
<td>
NEUTRAL
</td>
<td>
4.5
</td>
<td>
11.2
</td>
<td>
7.4
</td>
</tr>
<tr>
<td>
ZEL
</td>
<td>
6.34
</td>
<td>
6.50
</td>
<td>
10.6%
</td>
<td>
OUTPERFORM
</td>
<td>
7.1
</td>
<td>
12.0
</td>
<td>
11.2
</td>
</tr>
</tbody>
</table>
Source: Forsyth Barr analysis
<div class="content-highlight">
Investment View
We maintain our OUTPERFORM rating on ZEL with the company trading on benign multiples and a healthy dividend yield. Our NZR rating is NEUTRAL due to an improving refining margin outlook coupled with lower capex guidance.
</div>
&nbsp;Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185
&nbsp;Adam Lourie
adam.lourie@forsythbarr.co.nz
+64 4 914 2273

The Good Oil
September 2019 — Improved GRM Outlook
August 2019 proved to be a positive month for Refining NZ (NZR) despite reporting a soft, albeit expected 1H19 result. We estimate NZR’s August 2019 gross refining margin (GRM) increased +3% from July’s estimate but most importantly our estimated GRM remains well above supressed levels recorded earlier in the year. Vehicle traffic growth remains positive on a 12-month rolling basis but growth continues to decline for light vehicle traffic while heavy vehicle traffic growth has flat-lined.
Refining margins remain healthy
We estimate NZR’s August 2019 GRM was US$8.06/barrel, increasing +3% on our previous month’s estimate. More importantly, NZR’s GRM remains well above the suppressed levels reported earlier in the year of below ~US$5.50/barrel. We estimate NZR’s GRM for the May/June bi-monthly period will be US$7.92/barrel with a processing fee of NZ$59.9m. NZR will release its GRM for the July/August period in September 2019.
NZR released a soft 1H19 result as expected with 1H19 NPAT of -NZ$4m. However, the outlook is more positive with the shipping sector getting closer to implementing Marpol, and NZR guiding to lower capex than anticipated. We have increased our target price +33cps to $2.15 and upgraded our rating to NEUTRAL.&nbsp;Capitalising Lower Capex&nbsp;(22/08/19) should be viewed for more information.
Light vehicle traffic growth continues to slow
Heavy vehicle traffic data increased strongly in July, up +5.1% on the pcp after a soft June. Light vehicle traffic also increased on the pcp but not quite as strongly, up +1.0%. On a 12-month rolling basis heavy vehicle traffic has flat-lined at +2.4% while light vehicle traffic growth also remains positive at +2.1%, but growth has been trending downwards for 15-months.
Provisional importer margins trend in opposite directions
Provisional petrol importer margins trended strongly upwards in August 2019 while diesel importer margins declined slightly. Diesel importer margins decreased -1% in August to average 32.6cpl, inline with margins in the pcp. Petrol importer margins increased +10% on the previous month to average 29.3cpl in August, rebounding from a soft prior month.
Figure 1. Summary company valuation metrics






Target


Target



1 year forward






Company


Price


Price


Return


Rating


EV/EBITDA (x)


PE (x)


Gr Yld




NZR


2.05


2.15


10.2%


NEUTRAL


4.5


11.2


7.4




ZEL


6.34


6.50


10.6%


OUTPERFORM


7.1


12.0


11.2




Source: Forsyth Barr analysis

Investment View
We maintain our OUTPERFORM rating on ZEL with the company trading on benign multiples and a healthy dividend yield. Our NZR rating is NEUTRAL due to an improving refining margin outlook coupled with lower capex guidance.

&nbsp;Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185
&nbsp;Adam Lourie
adam.lourie@forsythbarr.co.nz
+64 4 914 2273

The Good Oil: September 2019 — Improved GRM Outlook