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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Z Energy Terminal Agreement Provides Refined Benefit

OUTPERFORM
The announcement that Z Energy (ZEL) has agreed terms with Refining NZ (NZR) that enables NZR to convert to an import terminal is positive, albeit largely expected. Relative to our expectations, the main benefit is bringing forward the date at which the refinery converts to an import terminal, lifting FY23 EBITDAF +NZ$15m to NZ$317m. The terms of the agreement with NZR appear in line with expectations, although we require more information to confirm that. We have left our target price unchanged at&nbsp; NZ$3.05, and retain our OUTPERFORM rating.


Agreement a positive step for ZEL


There are several positives for ZEL from NZR moving to an import terminal. 1) It will increase ZEL's earnings relative to the current low gross refining margin induced earnings, 2) It will mean ZEL is competing on the same importer basis as Gull, 3) It will reduce ZEL's earnings volatility, 4) It will simplify ZEL's business operationally, 5) It will release significant working capital (we estimate ~NZ$130m) that can be used to repay debt, 6) It will enable ZEL to sell its stake in NZR, realising a further ~NZ$30m as NZR will no longer be a strategic asset.


Minor value change, bringing&nbsp;forward the conversion date


Relative to expectations, there is no material change to our forecasts. We have brought forward nine months to 30 June 2022, the conversion date of the refinery to an import terminal, which lifts FY23 earnings +NZ$15m (~2cps). We had assumed subdued refining margins would continue throughout FY23. There are no changes to our FY22 or FY24 forecasts.


Understanding the accounting&nbsp;— what we assume


ZEL has historically reported the financial "benefit" of using the refinery in gross profit, separate to the Fuels gross profit. After the refinery has converted to an import terminal, the Refining gross profit will fall to nil, with ZEL reporting an increase in Fuels gross profit. There should also be a modest fall in operating costs due to the business being simpler to operate.
Historically (pre COVID-19), the reported Refining gross margin averaged NZ$55m in the five years FY16 to FY20. In FY21, ZEL reported a Refining gross loss of -NZ$21m and we are forecasting gross profit of NZ$6m in FY22 (and had forecast NZ$18m in FY23). We estimate the new deal is worth the equivalent of ~NZ$37m, so a significant step up on the current refinery "performance", but down on historic levels when gross refining margins were well above processing fee floor levels. ZEL will be providing more information at its 28 July investor day.



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: Terminal Agreement Provides Refined Benefit

Z Energy Ltd

Z Energy: Terminal Agreement Provides Refined Benefit