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>
Flock of Black Swans Take Out Jet
OUTPERFORM
Z Energy (ZEL) has faced many unexpected challenges in the past 18 months but none more so than the current COVID-19 black swan event. Jet fuel demand is plummeting, creating significant logistical issues and the imminent four week lock-down will also hit retail and commercial volumes, by an unknown amount. Our analysis of ZEL's earnings outlook and balance sheet strength suggests it will likely withstand the current environment. However, we expect the 2H20 final dividend and 1H21 interim dividend to be casualties of the need to preserve cash. That said, we believe the share price reaction has been overdone and whilst we are cutting our target price -11% to $4.00, ZEL is a strong business that will come through the current crisis. We are retaining our OUTPERFORM rating.
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">ZEL</td>
<td style="width: 48pt;">Financials:Mar/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$2.98</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">195.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">136.4</td>
<td style="text-align: left; width: 43.2pt;">57.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">123.4&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">4.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">5.5</td>
<td style="text-align: left; width: 48pt;">8.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">6.1&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$4.00</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">49.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">34.1&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">14.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">30.9&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">6.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">9.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">17.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">10.1&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">Medium</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">-7.4</td>
<td style="text-align: left; width: 42.6pt;">-30.4</td>
<td style="text-align: left; width: 43.2pt;">-58.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">6.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">8.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">20.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">9.7&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">400.0m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">43.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">16.5&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">20.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">30.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">4.7</td>
<td style="text-align: left; width: 42.6pt;">28.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">8.4</td>
<td style="text-align: left; width: 42.6pt;">6.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$1,192m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">100</td>
<td style="text-align: left; width: 42.6pt;">100</td>
<td style="text-align: left; width: 43.2pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">14.4</td>
<td style="text-align: left; width: 42.6pt;">5.5</td>
<td style="text-align: left; width: 48pt;">6.7&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">10.1&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">858.2k (NZ$4,727k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">20.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">7.7</td>
<td style="text-align: left; width: 48pt;">9.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">14.0&nbsp;</td>
</tr>
</tbody>
</table>
Heading into uncharted territory
New&nbsp;Zealand's&nbsp;lock-down starts tonight. No one knows exactly how long the lock down will last (initially it's four weeks) or how that will impact fuel volumes and therefore earnings. Jet volumes are already being impacted and with Air New&nbsp;Zealand&nbsp;(AIR) cutting international services -85% and 80% of jet fuel consumption related to overseas travel, jet fuel demand is likely to be minimal. The impact on petrol and diesel volumes is less certain, hence, we have&nbsp;focussed&nbsp;on sensitivity analysis.
Debt covenants only threatened in a downside scenario
Its retail bond covenant is only breached if&nbsp;ZEL's&nbsp;core net debt/EBITDA&nbsp;ratio is above&nbsp;3.5x for two consecutive periods&nbsp;(we do not know the bank or&nbsp;USPP&nbsp;covenants, but assume they are the same). We estimate that petrol and diesel volumes will need to fall more than -30% for the whole of 1H21, such that 1H20&nbsp;EBITDA&nbsp;is less than $80m&nbsp;(post-IFRS&nbsp;16) before the covenant is threatened for the first time at 30 September 2021. However, we note that in addition to volume, retail margins will be a critical factor in 1H21 earnings.
Forecast changes reflect challenging near-term outlook
One casualty of the uncertain climate is likely to be the final 2H20 dividend. We struggle to see a scenario where a final dividend will be paid and also expect the 1H21 interim dividend will be similarly suspended to maximise cash retained in the business. Longer-term we have lowered our dividend forecast to 30cps as we expect&nbsp;ZEL&nbsp;to retain more cash in the business than it has previously. Our base 1H21 petrol and diesel volume decline assumption is -20%, with a recovery in 2H21. The impact on FY21&nbsp;EBITDA&nbsp;is -24% (-$84m) to $266m. At this stage we anticipate a strong recovery in FY22, albeit not back to "normal" levels. Our FY22&nbsp;EBITDA&nbsp;cut is -4% ($14m) to $348m.
We are retaining our OUTPERFORM rating.&nbsp;ZEL&nbsp;provides a product that is a core staple and so will have a degree of resilience to the forthcoming economic downturn. We believe the share price reaction is overdone with the valuation impact of the short-term earnings hit ~-10%. Our target price is -46cps (-11%) lower to $4.00.
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185

Z Energy
Flock of Black Swans Take Out Jet
OUTPERFORM
Z Energy (ZEL) has faced many unexpected challenges in the past 18 months but none more so than the current COVID-19 black swan event. Jet fuel demand is plummeting, creating significant logistical issues and the imminent four week lock-down will also hit retail and commercial volumes, by an unknown amount. Our analysis of ZEL's earnings outlook and balance sheet strength suggests it will likely withstand the current environment. However, we expect the 2H20 final dividend and 1H21 interim dividend to be casualties of the need to preserve cash. That said, we believe the share price reaction has been overdone and whilst we are cutting our target price -11% to $4.00, ZEL is a strong business that will come through the current crisis. We are retaining our OUTPERFORM rating.
         


NZX Code
ZEL
Financials:Mar/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$2.98
NPAT* (NZ$m)
195.8&nbsp;
136.4
57.3&nbsp;
123.4&nbsp;
EV/EBITDA
4.4&nbsp;
5.5
8.0&nbsp;
6.1&nbsp;


Target price
NZ$4.00
EPS* (NZc)
49.0&nbsp;
34.1&nbsp;
14.3&nbsp;
30.9&nbsp;
EV/EBIT
6.1&nbsp;
9.1&nbsp;
17.1&nbsp;
10.1&nbsp;


Risk rating
Medium
EPS growth* (%)
-7.4
-30.4
-58.0&nbsp;
n/a
PE
6.1&nbsp;
8.7&nbsp;
20.8&nbsp;
9.7&nbsp;


Issued shares
400.0m
DPS (NZc)
43.0&nbsp;
16.5&nbsp;
20.0&nbsp;
30.0&nbsp;
Price/NTA
4.7
28.7&nbsp;
8.4
6.4&nbsp;


Market cap
NZ$1,192m
Imputation (%)
100
100
100
100
Cash div yld (%)
14.4
5.5
6.7&nbsp;
10.1&nbsp;


Avg daily turnover
858.2k (NZ$4,727k)
*Based on normalised profits


Gross div yld (%)
20.0&nbsp;
7.7
9.3&nbsp;
14.0&nbsp;



Heading into uncharted territory
New&nbsp;Zealand's&nbsp;lock-down starts tonight. No one knows exactly how long the lock down will last (initially it's four weeks) or how that will impact fuel volumes and therefore earnings. Jet volumes are already being impacted and with Air New&nbsp;Zealand&nbsp;(AIR) cutting international services -85% and 80% of jet fuel consumption related to overseas travel, jet fuel demand is likely to be minimal. The impact on petrol and diesel volumes is less certain, hence, we have&nbsp;focussed&nbsp;on sensitivity analysis.
Debt covenants only threatened in a downside scenario
Its retail bond covenant is only breached if&nbsp;ZEL's&nbsp;core net debt/EBITDA&nbsp;ratio is above&nbsp;3.5x for two consecutive periods&nbsp;(we do not know the bank or&nbsp;USPP&nbsp;covenants, but assume they are the same). We estimate that petrol and diesel volumes will need to fall more than -30% for the whole of 1H21, such that 1H20&nbsp;EBITDA&nbsp;is less than $80m&nbsp;(post-IFRS&nbsp;16) before the covenant is threatened for the first time at 30 September 2021. However, we note that in addition to volume, retail margins will be a critical factor in 1H21 earnings.
Forecast changes reflect challenging near-term outlook
One casualty of the uncertain climate is likely to be the final 2H20 dividend. We struggle to see a scenario where a final dividend will be paid and also expect the 1H21 interim dividend will be similarly suspended to maximise cash retained in the business. Longer-term we have lowered our dividend forecast to 30cps as we expect&nbsp;ZEL&nbsp;to retain more cash in the business than it has previously. Our base 1H21 petrol and diesel volume decline assumption is -20%, with a recovery in 2H21. The impact on FY21&nbsp;EBITDA&nbsp;is -24% (-$84m) to $266m. At this stage we anticipate a strong recovery in FY22, albeit not back to "normal" levels. Our FY22&nbsp;EBITDA&nbsp;cut is -4% ($14m) to $348m.
We are retaining our OUTPERFORM rating.&nbsp;ZEL&nbsp;provides a product that is a core staple and so will have a degree of resilience to the forthcoming economic downturn. We believe the share price reaction is overdone with the valuation impact of the short-term earnings hit ~-10%. Our target price is -46cps (-11%) lower to $4.00.
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185


Z Energy: Flock of Black Swans Take Out Jet

Z Energy Ltd

Z Energy: Flock of Black Swans Take Out Jet