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>
Retail F<a target="_blank"></a>uel Market Study Results to be Revealed Thursday
On Thursday 5 December, the Commerce Commission (ComCom) will be releasing its final Retail Fuel Market Study report. We believe it is likely to walk back from some of its draft statements, with retail fuel market competition intensifying in the past few months. Our understanding is that retail competition remains tough and hence Z Energy’s (ZEL) earnings remain under pressure (consistent with expectations). In addition, refining margins are down, causing additional margin pressures for ZEL.
What’s changed?
<ul>
<li>Earnings: FY20 EBITDAF cut -$7m to $389m (one-off earnings hit)</li>
<li>Target Price: -9cps lower to $5.11 (ZEL is ex-dividend)</li>
<li>Rating: NEUTRAL rating retained</li>
</ul>
ComCom Retail Fuel Study to be revealed on Thursday
On Thursday 5 December, the ComCom will release its final report on the Retail Fuel Market. We expect it to walk back from some of its draft conclusions, in particular that ZEL’s ROIC is above 20% (although we expect the ComCom will still conclude ZEL is “over-earning”). The ComCom’s draft report included possible solutions, including opening up the “borrow and loan” system to third parties. There is a reasonable chance that the ComCom decides not to provide any recommendations, but if it does, we anticipate that the potential “borrow and loan” recommendation will be replaced with a recommendation to move to terminal gate pricing — something ZEL has advocated.
Retail competition of greater concern than regulation
In our view, the retail competition is having a greater impact on ZEL earnings than anything that may come from the ComCom on Thursday. Retail margins have been under pressure since July and our understanding is that there has been little change in the last month (consistent with expectations).
Refining margin collapse not helping ZEL’s earnings
The Singapore complex refining margin has collapsed in the past few weeks, which is impacting on Refining NZ (NZR) margins and in turn ZEL. We have lowered our NZR FY19 gross refining margin assumption -17% to US$5.45/barrel. The flow on effect to ZEL is lowering the refining contribution -$5m and our NZR dividend -$2m. In the past, ZEL has been able to offset reduced NZR refining margins in the retail market, however, we do not believe that is possible at this point in time.
ZEL looking increasingly good value, but …
At $5.14, ZEL appears to be very good value. The gross dividend yield (at 48cps) is 13.0% and the FY20 PE is 13.8x. However, the market is clearly not convinced that 48cps is sustainable. Our analysis suggests the market is pricing in a sustainable dividend of ~36cps, -12cps below the bottom of its guidance range, which in turn implies a retail margin ~-15% lower than current margins.&nbsp;
<div class="content-highlight">
Investment View
Our rating is NEUTRAL. Whilst ZEL entices investors with a very attractive dividend yield, challenges in the retail market and the ComCom Fuel Study means further earnings and therefore dividend downside cannot be ruled out. We believe ZEL has to once again demonstrate it is able to deliver sustainable earnings, preferably with less volatility than the past two years.&nbsp;
</div>
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185

Z Energy
Retail Fuel Market Study Results to be Revealed Thursday
On Thursday 5 December, the Commerce Commission (ComCom) will be releasing its final Retail Fuel Market Study report. We believe it is likely to walk back from some of its draft statements, with retail fuel market competition intensifying in the past few months. Our understanding is that retail competition remains tough and hence Z Energy’s (ZEL) earnings remain under pressure (consistent with expectations). In addition, refining margins are down, causing additional margin pressures for ZEL.
What’s changed?

Earnings: FY20 EBITDAF cut -$7m to $389m (one-off earnings hit)
Target Price: -9cps lower to $5.11 (ZEL is ex-dividend)
Rating: NEUTRAL rating retained

ComCom Retail Fuel Study to be revealed on Thursday
On Thursday 5 December, the ComCom will release its final report on the Retail Fuel Market. We expect it to walk back from some of its draft conclusions, in particular that ZEL’s ROIC is above 20% (although we expect the ComCom will still conclude ZEL is “over-earning”). The ComCom’s draft report included possible solutions, including opening up the “borrow and loan” system to third parties. There is a reasonable chance that the ComCom decides not to provide any recommendations, but if it does, we anticipate that the potential “borrow and loan” recommendation will be replaced with a recommendation to move to terminal gate pricing — something ZEL has advocated.
Retail competition of greater concern than regulation
In our view, the retail competition is having a greater impact on ZEL earnings than anything that may come from the ComCom on Thursday. Retail margins have been under pressure since July and our understanding is that there has been little change in the last month (consistent with expectations).
Refining margin collapse not helping ZEL’s earnings
The Singapore complex refining margin has collapsed in the past few weeks, which is impacting on Refining NZ (NZR) margins and in turn ZEL. We have lowered our NZR FY19 gross refining margin assumption -17% to US$5.45/barrel. The flow on effect to ZEL is lowering the refining contribution -$5m and our NZR dividend -$2m. In the past, ZEL has been able to offset reduced NZR refining margins in the retail market, however, we do not believe that is possible at this point in time.
ZEL looking increasingly good value, but …
At $5.14, ZEL appears to be very good value. The gross dividend yield (at 48cps) is 13.0% and the FY20 PE is 13.8x. However, the market is clearly not convinced that 48cps is sustainable. Our analysis suggests the market is pricing in a sustainable dividend of ~36cps, -12cps below the bottom of its guidance range, which in turn implies a retail margin ~-15% lower than current margins.&nbsp;

Investment View
Our rating is NEUTRAL. Whilst ZEL entices investors with a very attractive dividend yield, challenges in the retail market and the ComCom Fuel Study means further earnings and therefore dividend downside cannot be ruled out. We believe ZEL has to once again demonstrate it is able to deliver sustainable earnings, preferably with less volatility than the past two years.&nbsp;

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

Z Energy: Retail Fuel Market Study Results to Be Revealed Thursday

Z Energy Ltd

Z Energy: Retail Fuel Market Study Results to Be Revealed Thursday