New Zealand Professional Investment Services Firm

Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Z Energy<br>Second Infection Less Worse — 1H22 Result</h2>
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<p><strong>NEUTRAL</strong></p>
<p>In a case of a "less worse" result, Z Energy (ZEL) has reported 1H22 EBITDAF of NZ$114m, +NZ$17m (+18%) better than 1H21 but still impacted ~-NZ$27m due to the return of COVID-19 in the last six weeks of 1H22, and as a result the second lowest 6-month result since the Caltex merger. Tailwinds in the form of favourable carbon and electricity price hedging and better refining margins offset the COVID-19 impact, such that ZEL has maintained FY22 EBITDAF guidance between NZ$270m and NZ$310m. ZEL has declared an interim fully imputed dividend of 7cps which is +2cps higher than the Ampol (ALD) takeover agreed dividend, meaning -2cps comes off the NZ$3.78 takeover price. With ZEL under takeover, our target price and rating are unchanged at NZ$3.64 and NEUTRAL respectively..</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY22E/FY23E/FY24E EBITDAF +NZ$14m/+NZ$2m/-NZ$10m to NZ$286m/NZ$325m/NZ$327m</li>
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<h3>Favourable tailwinds offset COVID-19 and margin softness</h3>
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<p>Relative to expectations&nbsp;ZEL's&nbsp;1H22 result was mixed. Whilst the NZ$114m EBITDAF result was +NZ$7m ahead of our forecast, NZ$14m was related to a refining contribution (+NZ$11m) and Flick Electric hedging gain (+NZ$3m).&nbsp;In addition, within the fuels gross margin was a carbon hedging gain of ~+NZ$20m. Whilst these tailwinds are expected to continue into FY23 (the carbon hedging gain is expected to increase), they are not enduring in the long-term. On the flip-side, rising crude oil prices once again resulted in a retail margin squeeze and the COVID-19&nbsp;lockdowns&nbsp;impacted volume, albeit not the same extent as in 1H21 (overall volumes were up +12% on 1H21). The fuels gross&nbsp;margin was -NZ$11m below our expectations.&nbsp;The main positive from the 1H22 result was the +NZ$4m increase in the non-fuels contribution, a strong outcome given the&nbsp;lockdowns&nbsp;and it is a key focus growth area for ZEL.</p>
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<h3>FY22 outlook unchanged, but subject to several key assumptions</h3>
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<p>ZEL has left its&nbsp;FY22 EBITDAF guidance range unchanged between NZ$270m and NZ$310m. That assumes NZ moves to the traffic light system in early December 2021, and that the gross refining margin averages US$6/barrel (up from US$4/barrel in 1H22), meaning NZR avoids further fee floor payments. With the carbon hedging tailwind expected to continue, we are more positive on the FY22 outlook, lifting our EBITDAF forecast +NZ$14m to NZ$286m.&nbsp;</p>
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<h3>Ampol&nbsp;takeover process still in early days</h3>
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<p>It is still early days in the takeover process, with ALD recently applying for Commerce Commission and the OIO approval. With regard to timing, the key question is how the ComCom views ALD's undertakings to sell Gull and whether completion will have to wait until after that divestment is unconditional or not. We believe the ComCom's stated 18 January 2022 date is a placeholder only.</p>
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Z Energy Second Infection Less Worse — 1H22 Result

NEUTRAL
In a case of a "less worse" result, Z Energy (ZEL) has reported 1H22 EBITDAF of NZ$114m, +NZ$17m (+18%) better than 1H21 but still impacted ~-NZ$27m due to the return of COVID-19 in the last six weeks of 1H22, and as a result the second lowest 6-month result since the Caltex merger. Tailwinds in the form of favourable carbon and electricity price hedging and better refining margins offset the COVID-19 impact, such that ZEL has maintained FY22 EBITDAF guidance between NZ$270m and NZ$310m. ZEL has declared an interim fully imputed dividend of 7cps which is +2cps higher than the Ampol (ALD) takeover agreed dividend, meaning -2cps comes off the NZ$3.78 takeover price. With ZEL under takeover, our target price and rating are unchanged at NZ$3.64 and NEUTRAL respectively..


What's changed?&nbsp;



Earnings:&nbsp;FY22E/FY23E/FY24E EBITDAF +NZ$14m/+NZ$2m/-NZ$10m to NZ$286m/NZ$325m/NZ$327m



Favourable tailwinds offset COVID-19 and margin softness


Relative to expectations&nbsp;ZEL's&nbsp;1H22 result was mixed. Whilst the NZ$114m EBITDAF result was +NZ$7m ahead of our forecast, NZ$14m was related to a refining contribution (+NZ$11m) and Flick Electric hedging gain (+NZ$3m).&nbsp;In addition, within the fuels gross margin was a carbon hedging gain of ~+NZ$20m. Whilst these tailwinds are expected to continue into FY23 (the carbon hedging gain is expected to increase), they are not enduring in the long-term. On the flip-side, rising crude oil prices once again resulted in a retail margin squeeze and the COVID-19&nbsp;lockdowns&nbsp;impacted volume, albeit not the same extent as in 1H21 (overall volumes were up +12% on 1H21). The fuels gross&nbsp;margin was -NZ$11m below our expectations.&nbsp;The main positive from the 1H22 result was the +NZ$4m increase in the non-fuels contribution, a strong outcome given the&nbsp;lockdowns&nbsp;and it is a key focus growth area for ZEL.


FY22 outlook unchanged, but subject to several key assumptions


ZEL has left its&nbsp;FY22 EBITDAF guidance range unchanged between NZ$270m and NZ$310m. That assumes NZ moves to the traffic light system in early December 2021, and that the gross refining margin averages US$6/barrel (up from US$4/barrel in 1H22), meaning NZR avoids further fee floor payments. With the carbon hedging tailwind expected to continue, we are more positive on the FY22 outlook, lifting our EBITDAF forecast +NZ$14m to NZ$286m.&nbsp;


Ampol&nbsp;takeover process still in early days


It is still early days in the takeover process, with ALD recently applying for Commerce Commission and the OIO approval. With regard to timing, the key question is how the ComCom views ALD's undertakings to sell Gull and whether completion will have to wait until after that divestment is unconditional or not. We believe the ComCom's stated 18 January 2022 date is a placeholder only.


Z Energy: Second Infection Less Worse — 1H22 Result

Z Energy Ltd

Z Energy: Second Infection Less Worse — 1H22 Result