Originally Posted by
ananda77
There is hope nevertheless:
Latest ASB recommendation report
Valuation: $8.30Undervalued but there is time to purchase Last updated:13/09/19
No-Moat Z Energy Disappoints the Market With Guidance Downgrade; Our NZD 8.30 Fair Value Unchanged
Investment rating
After Shell's exit in 2010, Z Energy successfully increased its gross fuels margin by 65%. However, New Zealand transport fuel consumption has stagnated for more than a decade and we think optimising the fuels margin can only go so far. Further, we have reservations in the owning of a stake in New Zealand's only refiner, comparatively modest though it is. Refineries are low-margin and capital-intensive, but Z Energy has many favourable attributes that make it an attractive investment at the right price. Management has made proven market inroads where Shell took its eye off the ball. Z Energy has driven returns on invested capital admirably back above its cost of capital, a key plank in a sustainable business model.
Event
Impact
Recommendation impact (last updated: 13/09/2019)
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Event analysis
No-Moat Z Energy Disappoints the Market With Guidance Downgrade; Our NZD 8.30 Fair Value Unchanged
Despite no-moat Z Energy downgrading its fiscal 2020 EBITDAF guidance by about 8% to NZD 390 million-NZD 430 million from NZD 425 million-NZD 465 million, our fair value estimate of NZD 8.30 stands. We continue see no long-term implication in the drivers, including unsustainable retail price competition and fuel discounting, exacerbated by cyclically low regional refiner margins. These are the same elements detracting from the current earnings of Australian counterparts Caltex Limited and Viva Energy Group. We think these metrics will favourably trend back to longer-term averages, and Z's infrastructure advantage should see it weather the storm as well as any.
Z also lowered its fiscal 2020 DPS guidance by about 0%-7.5% to NZD 0.48-NZD 0.50 from NZD 0.48-NZD 0.54. We lower our fiscal 2020 EBITDAF and DPS forecasts by 12% and 6% to guidance midpoint NZD 410 million and NZD 0.49, respectively. At the announcement-battered NZD 5.70 share price, down 10% on the day, the dividend translates to an even more appealing fully imputed 8.6% yield. Z's intention remains to pay out 70%-85% of free cash flow, where free cash flow is defined as replacement cost, or RC, EBITDAF less RC tax, financing costs, and long-term integrity capital expenditures. The focus is on returning cash to shareholders, and the company says there is no near-term need to allocate material capital to noncore investments in the pursuit of revenue stream diversification. We agree with this conservative course of action.
Yield is the key attraction, and the shares remain materially undervalued in relation to it. We suspect that the market is overly focused on the low growth outlook rather than the income appeal of the stock. We applaud Z's focus on shareholder returns. The company's strategy of optimising the asset base and improving operating efficiency continues to pay off--return on equity is consistently above Australasian peers, and we expect this to continue to support the yield if not growth.