New Zealand Professional Investment Services Firm

Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Z Energy<br>Pumping Up the Volume</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Z Energy's (ZEL) October 2020 volumes show a continuing positive trend, in particular Caltex retail volumes, which for the first time in 2020 are ahead of 2019 volumes. Commercial diesel volumes also continue to perform well following a significant contract win in the middle of the year. In addition, the MBIE retail margin indicator and Singapore benchmark refining margins are holding or improving. ZEL has positive momentum at present, in stark contrast to much of the last three years. We reiterate our OUTPERFORM rating.</p>
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<h3>Another positive volume month for ZEL</h3>
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<p>ZEL's total October 2020 retail volumes lifted +3.1% vs. October 2019, but within that Caltex branded volumes increased +3.9%. It is the first month in 2020 that Caltex volumes have exceeded those in 2019, which is a positive milestone given the loyalty scheme changes that took place in 2019 and the rebranding of three high volume Caltex sites to Z.&nbsp;</p>
<p>Commercial diesel volumes showed the greatest growth, up +10.5% vs. October 2019&nbsp;following its successful Fletcher Building contract win in the middle of the year. However, other commercial volumes (in particular jet and marine fuel) continue to trend well below prior year volumes and are not expected to recover in FY21.</p>
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<h3>Retail margins holding up and even refining margins are off their lows</h3>
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<p>In addition to positive volume momentum, indications are that retail margins are stable and that refining margins are off the bottom (albeit still some distance from&nbsp;historic averages). The rolling four-week blended importer margin is 26.9cpl, +3.0cpl higher than the same time last year. More importantly, importer margins have been reasonably steady for much of the four months and do not have to increase for ZEL to hit FY21 EBITDAF guidance.</p>
<p>One of the headwinds ZEL has been facing for most of the past year has been low refining margins, requiring ZEL to top up Refining&nbsp;NZ's&nbsp;processing fees. The rolling four-week Singapore benchmark margin is US$1.2/barrel, a marked improvement on -US$1.4/barrel in June 2020, albeit still well below the historic 10-year average of US$4.5/barrel. Whilst we expect the fee floor to remain in operation for the foreseeable future, any improvement in refining margins helps reduce the headwind ZEL faces.</p>
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<h3>On track for a positive re-rating</h3>
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<p>We maintain our positive stance on ZEL. ZEL still has work to do, but there is positive momentum in the business. Volumes are performing well, importer margins are holding up and there are even some positive signs in recent weeks that refining margins are off their floor of mid-2020. Barring another nationwide Level 3 or 4 lockdown, ZEL should deliver FY21 EBITDAF earnings within guidance. That in turn will enable ZEL to provide FY22 dividend guidance with a degree of confidence. We expect continued positive news flow will help unwind the significant discount the stock is currently trading on and reiterate our OUTPERFORM rating.&nbsp;</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>
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Z Energy Pumping Up the Volume

OUTPERFORM
Z Energy's (ZEL) October 2020 volumes show a continuing positive trend, in particular Caltex retail volumes, which for the first time in 2020 are ahead of 2019 volumes. Commercial diesel volumes also continue to perform well following a significant contract win in the middle of the year. In addition, the MBIE retail margin indicator and Singapore benchmark refining margins are holding or improving. ZEL has positive momentum at present, in stark contrast to much of the last three years. We reiterate our OUTPERFORM rating.


Another positive volume month for ZEL


ZEL's total October 2020 retail volumes lifted +3.1% vs. October 2019, but within that Caltex branded volumes increased +3.9%. It is the first month in 2020 that Caltex volumes have exceeded those in 2019, which is a positive milestone given the loyalty scheme changes that took place in 2019 and the rebranding of three high volume Caltex sites to Z.&nbsp;
Commercial diesel volumes showed the greatest growth, up +10.5% vs. October 2019&nbsp;following its successful Fletcher Building contract win in the middle of the year. However, other commercial volumes (in particular jet and marine fuel) continue to trend well below prior year volumes and are not expected to recover in FY21.


Retail margins holding up and even refining margins are off their lows


In addition to positive volume momentum, indications are that retail margins are stable and that refining margins are off the bottom (albeit still some distance from&nbsp;historic averages). The rolling four-week blended importer margin is 26.9cpl, +3.0cpl higher than the same time last year. More importantly, importer margins have been reasonably steady for much of the four months and do not have to increase for ZEL to hit FY21 EBITDAF guidance.
One of the headwinds ZEL has been facing for most of the past year has been low refining margins, requiring ZEL to top up Refining&nbsp;NZ's&nbsp;processing fees. The rolling four-week Singapore benchmark margin is US$1.2/barrel, a marked improvement on -US$1.4/barrel in June 2020, albeit still well below the historic 10-year average of US$4.5/barrel. Whilst we expect the fee floor to remain in operation for the foreseeable future, any improvement in refining margins helps reduce the headwind ZEL faces.


On track for a positive re-rating


We maintain our positive stance on ZEL. ZEL still has work to do, but there is positive momentum in the business. Volumes are performing well, importer margins are holding up and there are even some positive signs in recent weeks that refining margins are off their floor of mid-2020. Barring another nationwide Level 3 or 4 lockdown, ZEL should deliver FY21 EBITDAF earnings within guidance. That in turn will enable ZEL to provide FY22 dividend guidance with a degree of confidence. We expect continued positive news flow will help unwind the significant discount the stock is currently trading on and reiterate our OUTPERFORM rating.&nbsp;



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 Ltd

Z Energy: Pumping Up the Volume