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<br>Low Fuel Warning Light Comes On</h2>
<div></div>
<p><strong>OUTPERFORM</strong></p>
<p>We have reviewed our long-term Z Energy (ZEL) volume forecast following the draft Climate Change Commission report and the government's decision to implement a tough tail pipe emissions standard, the upshot being a material cut in long-term volumes. Whilst our revised volume forecast is consistent with the regulatory goals, we view this as a worst case scenario as the hurdles to achieve the goals are high. Importantly, even under the worst case scenario, we still see value in ZEL and retain our OUTPERFORM rating. However, we do not see as much value as previously and cut our target price -20% to NZ$3.45.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/193/682/original/blobid0.png?1615508792" class="editor-image img-responsive" data-smartkarma-image-id="193682"></figure>
<div>
<h3>What's changed?&nbsp;</h3>
</div>
<div id="m_1116565888759617480iwrmo3">
<ul>
<li><strong>Earnings</strong>:&nbsp;FY21/FY22/FY23 EBITDAF -2%/-4%/-3% lower to NZ$237m/NZ$300m/NZ$326m</li>
<li><strong>Target price</strong>:&nbsp;Cut -20% (-NZ$0.85) to NZ$3.45</li>
</ul>
</div>
<div>
<h3>Even adjusting volumes to the worst case scenario, there is still value in ZEL</h3>
</div>
<div id="m_1116565888759617480i2nuf">
<p>The question we have tried to answer is whether there is value in ZEL, even if the worst case scenario eventuates. The answer is yes, but clearly the upside is less than if there was no regulatory intervention. Following the Climate Change Commission's (CCC) draft report, the market has focussed on ZEL's long-term future. We believe fossil fuel bans and new emission targets the government is implementing is the worst case scenario for ZEL — there are huge challenges in implementation. That said, we struggle to see the market valuing any other scenario for the foreseeable future. Whilst the long-term outlook may be more challenging, our near-term volume and earnings forecasts are little changed when material reductions not taking place until the late 2020s. Our revised DCF valuation is NZ$3.36, down from NZ$4.94 (although ~-30cps is due to cost of capital changes).</p>
</div>
<div>
<h3>Near-term positive catalysts should lift ZEL back to NZ$3.00</h3>
</div>
<div id="m_1116565888759617480idlz8">
<p>We see three short-term positive catalysts for ZEL. 1) The reinstatement of the dividend in FY22 (to be announced at the FY21 result in May). Whilst we have trimmed our forecast -2cps to 23cps to ensure ZEL is debt free by 2035, the FY22 gross dividend yield of 12.0% should be attractive. 2) Confirmation of the refinery conversion. This will release working capital (we estimate ~NZ$150m) and relative to the current forecast, refinery contribution should lift earnings at least ~+NZ$10m. 3) Whilst ZEL has taken the top off its guidance range, delivering on guidance is a modest positive in the context of recent years disappointments.</p>
</div>
<div>
<h3>Minor changes to near-term forecast</h3>
</div>
<div id="m_1116565888759617480i47yd">
<p>February 2021 volumes were a continuation of the weak January 2021 volumes, although there are some signs of improvement. Our near-term forecast changes are relatively minor as we have trimmed EBITDAF -NZ$6m to NZ$237m due to softer than expect volumes and retail margins continue to be under pressure due to rising crude oil prices. We are towards the bottom of ZEL's narrower FY21 EBITDAF NZ$235m to NZ$245m guidance range.</p>
</div>
<div>
<div>
<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>
<div></div>
</div>
</div>
<div>
<div>
<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>
</div>

Z Energy Low Fuel Warning Light Comes On

OUTPERFORM
We have reviewed our long-term Z Energy (ZEL) volume forecast following the draft Climate Change Commission report and the government's decision to implement a tough tail pipe emissions standard, the upshot being a material cut in long-term volumes. Whilst our revised volume forecast is consistent with the regulatory goals, we view this as a worst case scenario as the hurdles to achieve the goals are high. Importantly, even under the worst case scenario, we still see value in ZEL and retain our OUTPERFORM rating. However, we do not see as much value as previously and cut our target price -20% to NZ$3.45.


What's changed?&nbsp;



Earnings:&nbsp;FY21/FY22/FY23 EBITDAF -2%/-4%/-3% lower to NZ$237m/NZ$300m/NZ$326m
Target price:&nbsp;Cut -20% (-NZ$0.85) to NZ$3.45



Even adjusting volumes to the worst case scenario, there is still value in ZEL


The question we have tried to answer is whether there is value in ZEL, even if the worst case scenario eventuates. The answer is yes, but clearly the upside is less than if there was no regulatory intervention. Following the Climate Change Commission's (CCC) draft report, the market has focussed on ZEL's long-term future. We believe fossil fuel bans and new emission targets the government is implementing is the worst case scenario for ZEL — there are huge challenges in implementation. That said, we struggle to see the market valuing any other scenario for the foreseeable future. Whilst the long-term outlook may be more challenging, our near-term volume and earnings forecasts are little changed when material reductions not taking place until the late 2020s. Our revised DCF valuation is NZ$3.36, down from NZ$4.94 (although ~-30cps is due to cost of capital changes).


Near-term positive catalysts should lift ZEL back to NZ$3.00


We see three short-term positive catalysts for ZEL. 1) The reinstatement of the dividend in FY22 (to be announced at the FY21 result in May). Whilst we have trimmed our forecast -2cps to 23cps to ensure ZEL is debt free by 2035, the FY22 gross dividend yield of 12.0% should be attractive. 2) Confirmation of the refinery conversion. This will release working capital (we estimate ~NZ$150m) and relative to the current forecast, refinery contribution should lift earnings at least ~+NZ$10m. 3) Whilst ZEL has taken the top off its guidance range, delivering on guidance is a modest positive in the context of recent years disappointments.


Minor changes to near-term forecast


February 2021 volumes were a continuation of the weak January 2021 volumes, although there are some signs of improvement. Our near-term forecast changes are relatively minor as we have trimmed EBITDAF -NZ$6m to NZ$237m due to softer than expect volumes and retail margins continue to be under pressure due to rising crude oil prices. We are towards the bottom of ZEL's narrower FY21 EBITDAF NZ$235m to NZ$245m guidance range.



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: Low Fuel Warning Light Comes On

Z Energy Ltd

Z Energy: Low Fuel Warning Light Comes On