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>Trailing By Fifty (Percent) at Half Time</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>For the third year in a row, Z Energy (ZEL) will report disappointing first half earnings, with COVID-19 decimating fuel volumes. Our 1H21 EBITDAF forecast of NZ$93m is close to half of the weak 1H20 result and is in the middle of&nbsp;ZEL's&nbsp;1H21 guidance range of NZ$85m to NZ$100m. ZEL will not be paying an interim dividend and we would be surprised if it suggests anything other than a resumption of dividends at the 1H22 result, one year from now. Outlook commentary will be important and we expect ZEL to provide FY21 earnings guidance, albeit the range could be quite large.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/167/795/original/image_9134733121603773147494.png?1603773149" class="editor-image img-responsive" data-smartkarma-image-id="167795"></figure>
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<h3>What we're expecting&nbsp;</h3>
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<li><strong>Reporting date</strong>:&nbsp;Wednesday, 4 November</li>
<li><strong>1H21 EBITDAF</strong>:&nbsp;NZ$93m, -NZ$90m (-49%) lower than 1H20</li>
<li><strong>1H21 Normalised NPAT</strong>:&nbsp;-NZ$6m, -NZ$77m lower than 1H20</li>
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<h3>COVID-19 decimated volumes and its effects are still being felt, extent of refinery pain to be revealed</h3>
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<p>1H21 has been dominated by the effects of COVID-19. Total volumes in 1Q21 were off ~-40% and jet and marine volumes continue to track ~-70%&nbsp;below normal. We are forecasting 1H21 EBITDAF of NZ$93m, -49% lower than the&nbsp;pcp, which itself was a weak period. We are also forecasting a Normalised NPAT loss of -NZ$6m for the first time.</p>
<p>One of the key issues that ZEL is dealing with is the refinery. Use of the refinery is a headwind, and we estimate that the refining gross margin&nbsp;will be ~-NZ$18m (typically it is ~+NZ$30m). With the refinery reducing capacity in 2021, we anticipate&nbsp;the refinery to continue to be a drag on earnings.</p>
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<h3>Do not expect anything regarding the dividend, but FY21 guidance likely to be provided</h3>
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<p>Whilst it is likely to be a question ZEL is asked, we believe it is highly unlikely that ZEL will seek to reinstate its dividend ahead of the 1H22 result. Not paying a dividend is painful for a dividend stock, but COVID-19 continues to provide plenty of uncertainty. A nationwide&nbsp;lockdown&nbsp;cannot be ruled out and the refinery&nbsp;headwinds are&nbsp;also unhelpful for reinstating the dividend early. However, barring a further&nbsp;lockdown, we expect ZEL will be in a position to provide FY21 guidance for the first time.</p>
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<h3>Is 1H21 a catalyst for ZEL to re-rate?</h3>
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<p>We don't think so, unless ZEL comes out with bullish FY21 EBITDAF guidance (equally it could be a negative catalyst if guidance implies very weak 2H21 earnings). Current market FY21 EBITDAF forecasts range between NZ$210m and NZ$245m, although the median forecast is NZ$241m (which is our forecast). Important milestones for ZEL that should help investor confidence are certainty around the refinery's future (timing of the Strategic Review is unclear, but a decision is more likely post-Christmas) and dividend reinstatement (it would be positive if ZEL could provide FY22 dividend guidance at its FY21 result in May 2021).</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 Trailing By Fifty (Percent) at Half Time

OUTPERFORM
For the third year in a row, Z Energy (ZEL) will report disappointing first half earnings, with COVID-19 decimating fuel volumes. Our 1H21 EBITDAF forecast of NZ$93m is close to half of the weak 1H20 result and is in the middle of&nbsp;ZEL's&nbsp;1H21 guidance range of NZ$85m to NZ$100m. ZEL will not be paying an interim dividend and we would be surprised if it suggests anything other than a resumption of dividends at the 1H22 result, one year from now. Outlook commentary will be important and we expect ZEL to provide FY21 earnings guidance, albeit the range could be quite large.


What we're expecting&nbsp;



Reporting date:&nbsp;Wednesday, 4 November
1H21 EBITDAF:&nbsp;NZ$93m, -NZ$90m (-49%) lower than 1H20
1H21 Normalised NPAT:&nbsp;-NZ$6m, -NZ$77m lower than 1H20



COVID-19 decimated volumes and its effects are still being felt, extent of refinery pain to be revealed


1H21 has been dominated by the effects of COVID-19. Total volumes in 1Q21 were off ~-40% and jet and marine volumes continue to track ~-70%&nbsp;below normal. We are forecasting 1H21 EBITDAF of NZ$93m, -49% lower than the&nbsp;pcp, which itself was a weak period. We are also forecasting a Normalised NPAT loss of -NZ$6m for the first time.
One of the key issues that ZEL is dealing with is the refinery. Use of the refinery is a headwind, and we estimate that the refining gross margin&nbsp;will be ~-NZ$18m (typically it is ~+NZ$30m). With the refinery reducing capacity in 2021, we anticipate&nbsp;the refinery to continue to be a drag on earnings.


Do not expect anything regarding the dividend, but FY21 guidance likely to be provided


Whilst it is likely to be a question ZEL is asked, we believe it is highly unlikely that ZEL will seek to reinstate its dividend ahead of the 1H22 result. Not paying a dividend is painful for a dividend stock, but COVID-19 continues to provide plenty of uncertainty. A nationwide&nbsp;lockdown&nbsp;cannot be ruled out and the refinery&nbsp;headwinds are&nbsp;also unhelpful for reinstating the dividend early. However, barring a further&nbsp;lockdown, we expect ZEL will be in a position to provide FY21 guidance for the first time.


Is 1H21 a catalyst for ZEL to re-rate?


We don't think so, unless ZEL comes out with bullish FY21 EBITDAF guidance (equally it could be a negative catalyst if guidance implies very weak 2H21 earnings). Current market FY21 EBITDAF forecasts range between NZ$210m and NZ$245m, although the median forecast is NZ$241m (which is our forecast). Important milestones for ZEL that should help investor confidence are certainty around the refinery's future (timing of the Strategic Review is unclear, but a decision is more likely post-Christmas) and dividend reinstatement (it would be positive if ZEL could provide FY22 dividend guidance at its FY21 result in May 2021).



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: Trailing By Fifty (Percent) At Half Time

Z Energy Ltd

Z Energy: Trailing By Fifty (Percent) At Half Time