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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Z Energy<br>Holiday Volumes Offset Margin Squeeze</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Z Energy's (ZEL) 3Q21 volumes and shop sales were strong, but not enough to offset a decline in retail margins. We have trimmed our FY21 EBITDAF forecast -NZ$3m (-1.1%) to NZ$243m and lowered our target price -5cps (-1.1%) to NZ$4.30. ZEL continues to trade on undemanding value metrics, and in our view only has to deliver on FY21 EBITDAF guidance with the promise of a modest FY22 dividend to positively&nbsp;rerate. We reiterate our OUTPERFORM rating.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY21 EBITDAF lowered -NZ$3m (-1.1%) to NZ$243m (vs. ZEL FY21 EBITDAF guidance of NZ$235m to NZ$265m)</li>
<li><strong>Target price</strong>:&nbsp; Reduced -5cps (-1.1%) to NZ$4.30</li>
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<h3>Good volumes, but more retail margin pressure</h3>
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<div id="m_-482156124665973106ihoh5">
<p>Following a soft November 2020, December 2020 volumes were well ahead of expectations, ensuring 3Q21 volumes were generally stronger than 3Q20. ZEL's 3Q21 retail volumes increased +2% and commercial diesel volumes increased +7%. These categories are the most important for the profitability of ZEL. The other stand-out feature of 3Q21 was the +6% increase in like-for-like weekly store sales. However, these positive features were offset by very weak December MBIE importer margins. We calculate the 3Q21 blended importer margin was 27.2cpl, -0.9cpl less than the very weak 3Q20 and -4.0cpl down on the prior 2Q21. November and December saw crude oil prices rise sharply, up +21% to NZ$78/barrel, and crude oil price movements always impact importer margins. In addition, ZEL has indicated its retail margins have not fallen by the amount the MBIE margins imply, with the level of market-wide discounting declining in December — MBIE is currently unable to track intra-quarter discount movements.</p>
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<h3>Modest forecast changes</h3>
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<div id="m_-482156124665973106ii7ze">
<p>We have lowered our FY21 EBITDAF forecast -1.1% (-NZ$3m) to NZ$243m. The lower retail margins (-2.9%) have been only partially offset by stronger retail (+1.7%) and commercial diesel (+5.4%) volumes and a +4.4% increase in convenience store sales. Perhaps most importantly, ZEL has reiterated its FY21 EBITDAF guidance range of&nbsp;NZ$235m to NZ$265m, indicating&nbsp;ZEL is confident that even if retail margins do not improve from current levels&nbsp;its FY21 result should still be within the guidance range.</p>
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<h3>Clear positive catalysts ahead</h3>
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<div id="m_-482156124665973106iindm">
<p>ZEL has two positive catalysts in front of it. First, simply delivering on its earnings guidance and reinstating a dividend will ensure a re-rating. ZEL is currently trading on an 11.2% gross dividend yield. Second, the refinery is a material headwind at present with refining margins remaining below the fee floor. Whilst it appears ZEL and Refining NZ are still some distance apart, we expect at some point in the coming six months the parties will agree to convert the refinery to an import terminal, unlocking significant working capital enabling ZEL to compete more effectively with the Tier 2 retailers.</p>
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<div><strong>Andrew Harvey-Green</strong></div>
<div><a href="mailto:andrew.harvey-green@forsythbarr.co.nz" target="_blank" rel="noopener">andrew.harvey-green@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 8185</div>
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<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
</div>
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Z Energy Holiday Volumes Offset Margin Squeeze

OUTPERFORM
Z Energy's (ZEL) 3Q21 volumes and shop sales were strong, but not enough to offset a decline in retail margins. We have trimmed our FY21 EBITDAF forecast -NZ$3m (-1.1%) to NZ$243m and lowered our target price -5cps (-1.1%) to NZ$4.30. ZEL continues to trade on undemanding value metrics, and in our view only has to deliver on FY21 EBITDAF guidance with the promise of a modest FY22 dividend to positively&nbsp;rerate. We reiterate our OUTPERFORM rating.


What's changed?&nbsp;



Earnings:&nbsp;FY21 EBITDAF lowered -NZ$3m (-1.1%) to NZ$243m (vs. ZEL FY21 EBITDAF guidance of NZ$235m to NZ$265m)
Target price:&nbsp; Reduced -5cps (-1.1%) to NZ$4.30



Good volumes, but more retail margin pressure


Following a soft November 2020, December 2020 volumes were well ahead of expectations, ensuring 3Q21 volumes were generally stronger than 3Q20. ZEL's 3Q21 retail volumes increased +2% and commercial diesel volumes increased +7%. These categories are the most important for the profitability of ZEL. The other stand-out feature of 3Q21 was the +6% increase in like-for-like weekly store sales. However, these positive features were offset by very weak December MBIE importer margins. We calculate the 3Q21 blended importer margin was 27.2cpl, -0.9cpl less than the very weak 3Q20 and -4.0cpl down on the prior 2Q21. November and December saw crude oil prices rise sharply, up +21% to NZ$78/barrel, and crude oil price movements always impact importer margins. In addition, ZEL has indicated its retail margins have not fallen by the amount the MBIE margins imply, with the level of market-wide discounting declining in December — MBIE is currently unable to track intra-quarter discount movements.


Modest forecast changes


We have lowered our FY21 EBITDAF forecast -1.1% (-NZ$3m) to NZ$243m. The lower retail margins (-2.9%) have been only partially offset by stronger retail (+1.7%) and commercial diesel (+5.4%) volumes and a +4.4% increase in convenience store sales. Perhaps most importantly, ZEL has reiterated its FY21 EBITDAF guidance range of&nbsp;NZ$235m to NZ$265m, indicating&nbsp;ZEL is confident that even if retail margins do not improve from current levels&nbsp;its FY21 result should still be within the guidance range.


Clear positive catalysts ahead


ZEL has two positive catalysts in front of it. First, simply delivering on its earnings guidance and reinstating a dividend will ensure a re-rating. ZEL is currently trading on an 11.2% gross dividend yield. Second, the refinery is a material headwind at present with refining margins remaining below the fee floor. Whilst it appears ZEL and Refining NZ are still some distance apart, we expect at some point in the coming six months the parties will agree to convert the refinery to an import terminal, unlocking significant working capital enabling ZEL to compete more effectively with the Tier 2 retailers.



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





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Z Energy: Holiday Volumes Offset Margin Squeeze

Z Energy Ltd

Z Energy: Holiday Volumes Offset Margin Squeeze