ZEL - Z Energy.

[Beagle]

https://www.nzherald.co.nz/business/...ectid=12303658

Premium fuel prices set to come |under the pump" according to AA.
Been rorting motorists for the last decade !!

[Oliver Mander]

but it also supports the view that they were ripping off the market earlier when there was less competition. so Jacinda was right about fleecing.
And it also shows that the free market will attend to destroying super profits (over time)

I think this is the point peat. I was involved in this industry at the time when Challenge & Gull entered, and when we were worried about others. At the time, the company I worked for responded, and its never looked back - maintaining its low cost base regardless of margins. History is repeating tho - increase in margins has attracted newcomers, with the added bonus of the majors scrapping it out for wholesale supply (this is a strong evolution of the market since the 1990's). Z is caught in no man's land - instead of building diversification by expanding out of NZ, they paid top $ for Caltex, have a high cost base compared with its fellow majors (BP, Mobil) and its smaller competitors and have seen margins erode as everyone scraps for market share. I hope they have a 'transformation' plan; they'll need it. I think things will get worse before they get better (although I do think things will eventually get better).

[Beagle]

I think this is the point peat. I was involved in this industry at the time when Challenge & Gull entered, and when we were worried about others. At the time, the company I worked for responded, and its never looked back - maintaining its low cost base regardless of margins. History is repeating tho - increase in margins has attracted newcomers, with the added bonus of the majors scrapping it out for wholesale supply (this is a strong evolution of the market since the 1990's). Z is caught in no man's land - instead of building diversification by expanding out of NZ, they paid top $ for Caltex, have a high cost base compared with its fellow majors (BP, Mobil) and its smaller competitors and have seen margins erode as everyone scraps for market share. I hope they have a 'transformation' plan; they'll need it. I think things will get worse before they get better (although I do think things will eventually get better).

For ZEL they better not get much worse because they reckon net margin is only 3.5 cents per liter. BTW - I noticed your article in the Herald on the weekend, well written mate.

[Beagle]

Thanks Dreamcatcher. Certainly got to enjoy a very nice dividend. Shame about the capital. Wondering whether to buy more when the price retests around the $4 mark or wait further / forever as Beagle seems to be suggesting. Perhaps "Sharktank" will increase market share over time? Any suggestions? Thanks guys...

From mid December

Get out while you can. The way this is shaping up EBITDAF could be < $300m for FY21, down from $350-380m in FY20

Another earnings downgrade for FY20 to come shortly ?

[winner69]

Sylvester - Seems the Z ‘transformation plan’ is selling more pies, coffees and sweets

[Oliver Mander]

Sylvester - Seems the Z ‘transformation plan’ is selling more pies, coffees and sweets

Which is not a bad plan in and of itself. But I think that "premium food offer" space is taken already by the green and gold one. And I can't see them saying "help yourself" to Z. Also, that doesn't address the cost base issue associated with either selling fuel or managing the shops...staff numbers seem high relative to the other majors. I get the focus on customer needs; but there is a balance with efficiency, especially in what is essentially a commodity fuels market. Even in that space, BP and Mobil have 98 octane to differentiate themselves a bit.

Beagle mentioned 3.5 cpl net margin. Even that is relatively high compared to what was going on when BP and Shell were slugging it out in the late 90's - 2000's. That period was not good for the industry (no investment possible), but it did shake out the weaker players (eg, Shell, then Caltex). Given that history (admittedly, experiential bias on my part), downside risk still seems quite high to me.

[Oliver Mander]

BTW - I noticed your article in the Herald on the weekend, well written mate.

Thanks Beagle!

[Beagle]

I agree SylvesterCat, BP's food offer is quite substantially better than ZEL and I have never understood why ZEL or Caltex have never had 98 Octane when many higher performance European cars require this fuel. Go figure ? Its like they have their head in the sand in this regard. ZEL have been the least extreme in their "milking" of motorists with the premium they've asked for 95 Octane but with price display coming its clear that further pressure is coming on their 95 Octane fuel margin. Just annualising apparent forecast 4th quarter margin's gives an interesting heads-up into possible earnings downside for FY21. Start factoring in reduced margins from premium fuel, ever increasing competition for the unmanned minnow station players, Govt action of wholesale pricing and requirements for increased jet fuel storage at Wiri and the steady roll-out of EV's, I agree 100%, the downside risk looks quite significant.

More concerning as you suggest is their cost structure and I really don't think one can rely on management to be proactive in cutting their cloth to suit the new reality that appears to be rapidly unfolding. Management have a history of "shocking" the market with downgrades both to earnings and dividends so anyone relying on 40 cps fully imputed annual dividends is taking a big risk as to its sustainability.

I can easily foresee that 3.5 cpl margin coming down to ~ 2 cpl in FY21.

[pierre]

Surely the Oil companies will just raise the price of 91 to cover the reduction in the current gains from premium fuels.
I doubt they will be very interested in taking the pain themselves.
They've never been renowned for philanthropy.

[Beagle]

Surely the Oil companies will just raise the price of 91 to cover the reduction in the current gains from premium fuels.
I doubt they will be very interested in taking the pain themselves.
They've never been renowned for philanthropy.

Yes, but, unmanned stations from the minnows will keep the pressure on. Whichever brand is first to differentiate themselves from the market by offering fast charging stations for EV's across most of their branch network will gain a significant first mover advantage. I wouldn't back ZEL's current management to be bright enough to realise this. BP probably better positioned anyway with their superior food and drink offer as early EV adopters are likely to be fairly well off and respond better to BP's more premium in store experience while waiting for their EV's to charge up.