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>Testing the Pump</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Z Energy (ZEL) is attractive on long-term valuation metrics, however,&nbsp;its performance over recent years has left investors wary of further unexpected negative surprises. Whilst we can see the long-term value in&nbsp;ZEL&nbsp;(it is trading at a material discount to its intrinsic value) there is still a high degree of uncertainty over the near-term outlook. Key issues are retail margins, which whilst low, do not appear to be low enough to prevent further expansion by the low cost operators, and the refinery's operational challenges. The current share price is factoring significant downside to current trading conditions such that we believe there is asymmetric&nbsp;risk to the upside, albeit that upside will take time to materialise. FY22 dividend visibility is a key factor for investors showing confidence in&nbsp;ZEL&nbsp;once again. We retain our OUTPERFORM rating, but patience is required.</p>
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<h3>Key changes:</h3>
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<li><strong>EBITDAF&nbsp;forecast</strong>:&nbsp;1H21 reduced -NZ$4m to NZ$91m, FY21/FY22 reduced -NZ$16m/-NZ$42m to NZ$239m/NZ$313m</li>
<li><strong>Dividend forecast</strong>:&nbsp;FY21 dividend unchanged (nil), FY22/FY23 dividend reduced -3cps to 25cps</li>
<li><strong>Target price/valuation</strong>: Target price increased +4% to NZ$4.35, DCF increased +9% to NZ$5.04 due to WACC changes</li>
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<h3>ZEL&nbsp;offers latent upside, but it will take time to materialise</h3>
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<div id="m_9060667448001760162i2rcb">
<p>Our conclusion is that the value is there, but we are yet to get comfort on the sustainable retail margin and the refinery is likely to be an earnings headwind until it converts to an import terminal (assuming it does). These issues flow into the likely FY22 dividend and therefore in our view a&nbsp;rerating&nbsp;is not imminent.</p>
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<div id="m_9060667448001760162i9nis">
<p>Whilst we do not expect a near-term rerating, we believe downside risk is limited. We assume retail margins of ~24cpl will continue for the remainder of FY21 (declining gradually beyond). Whilst 24cpl margins are low by recent standards, it is possible that margins track temporarily lower (as they did in October 2019). In our view the share price is already factoring in margins ~-5cpl lower, which is below the October 2019 dip and which would result in a dividend of ~15cps, providing a not unattractive gross dividend yield of 7.6%. i.e. even at sustained record low retail margins, ZEL provides value, particularly in the current low interest rate environment.</p>
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<h3>Forecast changes reflect more caution on the refinery outlook, valuation uplift due to continued falling interest rates</h3>
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<div id="m_9060667448001760162ixdnk">
<p>We have lowered our near-term forecasts significantly, with the main catalyst for the softer outlook an expectation the refinery will continue to provide headwinds. That has flowed through to our FY22 dividend forecast which is down -3cps to 25cps. However, ZEL is a business that retails an inelastic product (COVID-19 disruptions aside) and should generate consistent earnings. In the current low interest rate environment, ZEL should be attracting dividend yield investors. Hence, ZEL is a benefactor of our recent WACC changes, such that our DCF has increased +9% to NZ$5.04 despite the earnings declines.&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>
</div>
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Z Energy Testing the Pump

OUTPERFORM
Z Energy (ZEL) is attractive on long-term valuation metrics, however,&nbsp;its performance over recent years has left investors wary of further unexpected negative surprises. Whilst we can see the long-term value in&nbsp;ZEL&nbsp;(it is trading at a material discount to its intrinsic value) there is still a high degree of uncertainty over the near-term outlook. Key issues are retail margins, which whilst low, do not appear to be low enough to prevent further expansion by the low cost operators, and the refinery's operational challenges. The current share price is factoring significant downside to current trading conditions such that we believe there is asymmetric&nbsp;risk to the upside, albeit that upside will take time to materialise. FY22 dividend visibility is a key factor for investors showing confidence in&nbsp;ZEL&nbsp;once again. We retain our OUTPERFORM rating, but patience is required.


Key changes:



EBITDAF&nbsp;forecast:&nbsp;1H21 reduced -NZ$4m to NZ$91m, FY21/FY22 reduced -NZ$16m/-NZ$42m to NZ$239m/NZ$313m
Dividend forecast:&nbsp;FY21 dividend unchanged (nil), FY22/FY23 dividend reduced -3cps to 25cps
Target price/valuation: Target price increased +4% to NZ$4.35, DCF increased +9% to NZ$5.04 due to WACC changes



ZEL&nbsp;offers latent upside, but it will take time to materialise


Our conclusion is that the value is there, but we are yet to get comfort on the sustainable retail margin and the refinery is likely to be an earnings headwind until it converts to an import terminal (assuming it does). These issues flow into the likely FY22 dividend and therefore in our view a&nbsp;rerating&nbsp;is not imminent.


Whilst we do not expect a near-term rerating, we believe downside risk is limited. We assume retail margins of ~24cpl will continue for the remainder of FY21 (declining gradually beyond). Whilst 24cpl margins are low by recent standards, it is possible that margins track temporarily lower (as they did in October 2019). In our view the share price is already factoring in margins ~-5cpl lower, which is below the October 2019 dip and which would result in a dividend of ~15cps, providing a not unattractive gross dividend yield of 7.6%. i.e. even at sustained record low retail margins, ZEL provides value, particularly in the current low interest rate environment.


Forecast changes reflect more caution on the refinery outlook, valuation uplift due to continued falling interest rates


We have lowered our near-term forecasts significantly, with the main catalyst for the softer outlook an expectation the refinery will continue to provide headwinds. That has flowed through to our FY22 dividend forecast which is down -3cps to 25cps. However, ZEL is a business that retails an inelastic product (COVID-19 disruptions aside) and should generate consistent earnings. In the current low interest rate environment, ZEL should be attracting dividend yield investors. Hence, ZEL is a benefactor of our recent WACC changes, such that our DCF has increased +9% to NZ$5.04 despite the earnings declines.&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: Testing the Pump