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Morningstar | Genesis Posts in Line FY18; FVE up 5%

Narrow-moat Genesis Energy's fiscal 2018 EBITDA rose 8% to NZD 361 million, though it would have been flat if it wasn't for acquisitions. Underlying net profit after tax fell 22% to NZD 58 million. The result was in line with our expectations, but 2019 guidance surprised on the downside. Fiscal 2019 guidance is for EBITDA of between NZD 350 and NZD 370 million, which at the midpoint is 5% below our prior expectations. The main headwinds for fiscal 2019 are a midlife inspection at the Huntly Unit 5 power plant, return to normal rainfall, and higher emissions costs. Management also flagged headwinds in fiscal 2020 will include an extended planned outage at the Kupe oil and gas field and further increases in emissions costs.

However, management continues to target EBITDA above NZD 400 million in fiscal 2021. We downgrade our near-term earnings forecasts to align with guidance. Thereafter, we forecast solid earnings growth as unfavourable gas supply contracts roll off, as well as expected growth in LPG and business sales, and efficiency improvements.

We increase our fair value estimate 5% to NZD 2.20 on the time value of money and make minor upgrades to longer-term assumptions around the benefit from gas contracts rolling off. At current prices, Genesis is overvalued. Our main concerns are relatively high financial leverage, exposure to volatile oil prices and the eventual decline of Kupe over the long term.

The firm's balance sheet remains stretched following recent acquisitions, with net debt/EBITDA of 3.4 times, well above peers. However, credit metrics will improve relatively quickly on earnings growth and the dividend reinvestment plan. We expect net debt/EBITDA to be at comfortable levels below 2.5 times within a couple of years. Pleasingly, debt maturity profile is long, with an average tenure of 11.4 years. The firm's average interest rate was 5.8% in fiscal 2018, up 10 basis points from 2017.

The customer segment EBITDA was flat at NZD 110 million on a comparable basis as higher prices were offset by lower volumes and higher operating costs as the firm increases its marketing spend and bulks up its sales team to drive revenue growth. The outlook is relatively good, despite intense retail competition. Focus is on expanding the LPG business and growing sales to business customers, as well as driving ongoing efficiency improvements through digitisation of customer service. The key to the latter is getting more customers to use self-service on the website, rather than calling the service centre. The firm is tracking well in this regard, with the proportion of digital customer interactions growing to 49% from 35% in fiscal 2016.

The wholesale segment also reported a flat result in fiscal 2018, with EBITDA of NZD 178 million. The performance was held back by increased emissions costs and the Tekapo B outage. The outlook is mixed. Positively, Tekapo B is back on line and Lake Tekapo storage is 44% above average for this time of year. The main headwinds are a midlife inspection of Huntly Unit 5 and rising emissions costs as the emissions trading scheme ramps up.

Kupe performed strongly, with EBITDA up 37% to NZD 115 million. Excluding the acquisition of an increased stake, EBITDA rose 12%, mainly on stronger volumes and prices. We forecast a solid performance in fiscal 2019, but 2020 production and thus earnings will be hurt by a scheduled shutdown of Kupe for 25 to 30 days.