EUR 850.00 For Business Accounts Only

Morningstar | Z Energy Cuts Guidance but the Cause Is Likely to Be Short-Lived. NZD 8.00 FVE Unchanged.

No-moat Z Energy has revised its fiscal 2019 EBITDA guidance by 6%-7% to NZD 420-455 million after a first quarter negatively impacted by supply chain disruptions and record high pump prices curtailing demand. While disappointing, coming on the back of our only recent fair value upgrade, we don't view the drivers as long-term and our NZD 8.00 per share fair value estimate stands. So too our NZD 0.54 fiscal 2019 DPS forecast, after Z Energy reaffirmed its targeted NZD 0.50-0.55 payment. But our underlying fiscal 2019 EPS forecast declines 6% to NZD 0.55, assuming the NZD 440 million EBITDA guidance midpoint is achieved, meaning the dividend payout is now at an extreme high-end 97% of underlying earnings from an already-high position. On our numbers, this still falls within Z Energy's unchanged "80%-100% of net cash inflow" dividend payout guidance, but only just. At the current NZD 7.30 share price, the implied fully imputed yield is 7.4%, still pitching Z Energy as an income stock. Our fiscal 2020 EPS and DPS forecasts are unchanged at NZD 0.60 and NZD 0.54, respectively, the payout back to the expected midrange 90%.

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. This crimped the refiner margin, in addition to necessitating Z Energy purchasing refined product at spot rather than the more favourable contract terms. Major refits were completed during the shut-down. Separately, rising crude prices have negatively impacted Z Energy's earnings due to the lag between when product sales are priced relative to the input costs. The reverse is true in a falling crude environment, as our unchanged midcycle USD 60 Brent crude forecast predicts versus current USD 72 per barrel spot. Hence our comfort recent earnings detractors are short-term in nature.

Our fair value estimate equates to a fiscal 2023 EV/EBITDA of 8.1, and P/E and yield of 11.6 and 7.5%, respectively, all inflated at WACC. We credit NZD 200 million or NZD 0.50 per share for the 15.4% Refining NZ stake, equivalent to just 6% of Z Energy's fair value overall. We are reluctant to push these valuation metrics further given the small low-growth market that is New Zealand. In nominal terms, the P/E and yield improve to 7.9 and 11.0%, respectively. Z Energy is only modestly leveraged, net debt/enterprise value of just 1.9, and forecast to be less than 1.5 within three years, despite the very heavy payout ratio.
Z Energy's updated midrange fiscal 2019 EBITDA guidance implies a gross fuel margin of NZD 0.17 per litre, a 10% reduction on NZD 0.19 levels achieved in fiscal 2017 and fiscal 2018, but in line with our unchanged NZD 0.17 per litre midcycle assumption in real 2018 terms. We think branding and refurbishment-driven margin improvement have gone as far as they can and now encourage competition. We assume five-year cumulative organic EBITDA growth of just 3.1%, only marginally outpacing inflation.

Z Energy said the combination of higher crude prices and a softer New Zealand dollar saw the main port price for 91 octane fuel hit a record NZD 2.29 per litre in mid-May. Road users curtailed consumption in response and margins consequently compressed. The company estimates the high first-quarter pump price negatively impacted EBITDA by NZD 10 million.