EUR 850.00 For Business Accounts Only

Morningstar | No Longer-Term Implications for Z Energy’s Softer-than-Expected 1H Earnings.

We make no change to our NZD 8.00 per share fair value estimate. No-moat Z Energy reported first-half fiscal 2019 replacement cost earnings down 40% to NZD 62.7 million. This was well below our NZD 118 million forecast, but we don’t view the drivers as long-term in nature. On our measure, replacement cost earnings before interest, tax, depreciation and amortisation, or RC EBITDA, fell 24% to NZD 170 million, again well below our NZD 230 million forecast.

Z Energy said the operating environment for the first half was the most challenging experienced in the company’s eight-and-a-half-year history. Crude oil price increased by 25%, the NZD/USD exchange rate dropped by 9%, and fuel taxes increased. Consequent record pump prices crimped retail demand and results were further impacted by an extended Refining NZ refinery shut-down, resulting in lost gross refiner margin and the need to purchase imports. Z Energy has reined-in its fiscal 2019 RC EBITDA guidance by 5% to NZD 400-435 million from NZD 420-455 million, already revised down by 6%-7% in July. We have cut to a below-guidance NZD 380 million which reduces our fiscal 2019 EPS forecast by 25% to NZD 0.41 from NZD 0.55. We see the higher crude price and weaker exchange rate persisting for some time yet.

That said, supply disruptions reflect a longer-than-expected one-in-15-year 24-day shut-down at the Marsden refinery in New Zealand, after issues with the hydrocracker extended the outage from the planned 15 days. Major refits were completed during the shut-down, lending confidence that issues won’t persist. And rising crude prices negatively impact Z Energy’s earnings due to the lag between product pricing relative to input costs. The reverse is true in a falling crude environment, as our unchanged midcycle USD 60 Brent crude forecast predicts, versus current USD 75 per barrel spot. Again, recent earnings detractors are short-term in nature.

Despite being up on the previous corresponding period’s NZD 10.4 cents, Z Energy’s NZD 12.5 cent interim dividend was well below our forecast on the lower earnings. The company’s prior guidance was for NZD 0.50-0.55 in fiscal 2019, cementing its appeal as an income stock. It says current challenging conditions have reduced the dividend from original guidance, without specifying a number. We reset our fiscal 2019 dividend forecast to NZD 0.45, equivalent to a 95% payout of underlying free cash flow and 110% of underlying NPAT. At the current NZD 5.50 share price, that still translates to a more than healthy 8% fully imputed yield.
Further Z Energy reaffirmed the longer-term commitment to payout 80%-100% of underlying free cash flows (net operating cash flow less maintenance capital expenditure less principal debt repayment), such that net debt/EBITDA is allowed to fall to 1.4-1.6 by fiscal 2021; annualised net debt/EBITDA was 2.8 at end first-half fiscal 2019. We think this accommodates a dividend of NZD 0.55 in fiscal 2020, a 92% payout on our unchanged NZD 0.60 EPS forecast, and a cracking 10% yield at the current share price.
We think Z Energy shares are materially undervalued. Our NZD 8.00 fair value estimate equates to an unchanged fiscal 2023 EV/EBITDA of 8.1 and P/E of 12, both inflated at WACC. In nominal terms, the P/E improves to 8.0. We assume limited five-year nominal EBITDA CAGR of 3.4% to NZD 522 million, recognising the small low-growth market that is New Zealand.