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

<h2>Z Energy</h2>
Caltex Star Continues to Wane — 3Q20 Operating Statistics
Z Energy’s (ZEL) 3Q20 operating statistics can best be described as modest, as expected. Caltex volumes continue to plummet, but Z branded volumes held up well in a declining market and store sales continue to be positive. We’ve trimmed our FY20 EBITDAF forecast -$2m to $358m (-0.5%) due to slightly lower volumes and a cut in NZR’s expected dividend. Our target price is down -8cps (-1.7%) to $4.60.
What’s changed?
<ul>
<li>Earnings: FY20 EBITDAF -$2m lower to $358m</li>
<li>Target Price: Reduced -8cps to $4.60</li>
<li>Rating: OUTPERFORM rating retained</li>
</ul>
ZEL’s 3Q20 operating statistics were generally in line with expectations.
3Q20 key points
<ul>
<li>Z branded retail volumes are down just -0.4%, but Caltex volumes are down -16.0% vs. pcp. There is a clear step down in Caltex volumes following its exit from the AA Smartfuels programme, although the rate of volume decline in 3Q20 was slightly better than 2Q20 (-17.4%) and 3Q20 included three months without AA Smartfuels vs. two months in 2Q20.</li>
<li>Commercial diesel volumes are down -6.1% due to weaker trucking volumes in the upper North Island,<a target="_blank"></a> and the loss of a commercial contract still coming through the numbers. ZEL has indicated that it has won new volumes pre-Christmas that will lift volumes in FY21 (albeit not materially). ZEL has also indicated that its bio-diesel plant is now operating at full capacity — aiding a recent commercial contract renewal.</li>
<li>Market share is up slightly (+40bps) on 2Q20, but industry volumes themselves fell an estimated -1.8%.</li>
<li>Discounting ramped up in 3Q20, largely offsetting higher MBIE margins. ZEL has indicated that its retail margins have improved slightly from 2Q20 levels — but are still well down on pcp.</li>
<li>The best news story continues to be shop sales, up +7% on the pcp.</li>
</ul>
Nelson tanks to exit borrow and loan system
ZEL has also confirmed its Nelson tanks are exiting the borrow and loan system as of 3 February. New Nelson terminal contracts are likely to be a small positive for ZEL in due course — although there is nothing changed in our forecasts.
Forecast changes modest (compared to previous changes)
The main changes to our forecasts are from slightly lower volume expectations (but not significantly so) and a lower NZR dividend. We have left our margin assumptions unchanged, although believe there may be some modest upside to our current forecast. FY20/21/22 EBITDAF is down -$2m/-$7m/-$6m respectively. To be a little more conservative we have also removed dividend growth, keeping the dividend flat at 40cps.
<div class="content-highlight">
Investment View
Our rating is OUTPERFORM. ZEL is offering investors good value, with the market pricing in additional downside that we do not believe is likely to eventuate. ZEL has yet to pull the cost lever and we expect it is looking attractive as a takeover target.&nbsp;
</div>
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185

Z Energy
Caltex Star Continues to Wane — 3Q20 Operating Statistics
Z Energy’s (ZEL) 3Q20 operating statistics can best be described as modest, as expected. Caltex volumes continue to plummet, but Z branded volumes held up well in a declining market and store sales continue to be positive. We’ve trimmed our FY20 EBITDAF forecast -$2m to $358m (-0.5%) due to slightly lower volumes and a cut in NZR’s expected dividend. Our target price is down -8cps (-1.7%) to $4.60.
What’s changed?

Earnings: FY20 EBITDAF -$2m lower to $358m
Target Price: Reduced -8cps to $4.60
Rating: OUTPERFORM rating retained

ZEL’s 3Q20 operating statistics were generally in line with expectations.
3Q20 key points

Z branded retail volumes are down just -0.4%, but Caltex volumes are down -16.0% vs. pcp. There is a clear step down in Caltex volumes following its exit from the AA Smartfuels programme, although the rate of volume decline in 3Q20 was slightly better than 2Q20 (-17.4%) and 3Q20 included three months without AA Smartfuels vs. two months in 2Q20.
Commercial diesel volumes are down -6.1% due to weaker trucking volumes in the upper North Island, and the loss of a commercial contract still coming through the numbers. ZEL has indicated that it has won new volumes pre-Christmas that will lift volumes in FY21 (albeit not materially). ZEL has also indicated that its bio-diesel plant is now operating at full capacity — aiding a recent commercial contract renewal.
Market share is up slightly (+40bps) on 2Q20, but industry volumes themselves fell an estimated -1.8%.
Discounting ramped up in 3Q20, largely offsetting higher MBIE margins. ZEL has indicated that its retail margins have improved slightly from 2Q20 levels — but are still well down on pcp.
The best news story continues to be shop sales, up +7% on the pcp.

Nelson tanks to exit borrow and loan system
ZEL has also confirmed its Nelson tanks are exiting the borrow and loan system as of 3 February. New Nelson terminal contracts are likely to be a small positive for ZEL in due course — although there is nothing changed in our forecasts.
Forecast changes modest (compared to previous changes)
The main changes to our forecasts are from slightly lower volume expectations (but not significantly so) and a lower NZR dividend. We have left our margin assumptions unchanged, although believe there may be some modest upside to our current forecast. FY20/21/22 EBITDAF is down -$2m/-$7m/-$6m respectively. To be a little more conservative we have also removed dividend growth, keeping the dividend flat at 40cps.

Investment View
Our rating is OUTPERFORM. ZEL is offering investors good value, with the market pricing in additional downside that we do not believe is likely to eventuate. ZEL has yet to pull the cost lever and we expect it is looking attractive as a takeover target.&nbsp;

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

Z Energy: Caltex Star Continues to Wane — 3Q20 Operating Statistics

Z Energy Ltd

Z Energy: Caltex Star Continues to Wane — 3Q20 Operating Statistics