Recommendation impact (last updated: 31/10/2019)

Event analysis
No-Moat Z Energy Stumbles in Heavy First-Half Retail Competition. No Change to NZD 8.30 FVE.

Our NZD 8.30 fair value for no-moat Z Energy stands. Z shares are 40% below all time NZD 8.50 highs in 2016 and materially undervalued. Demonstrable stabilisation to both regional refiner and retail margins is the likely catalyst to a share price re-rate. The first plank might already be underway with September quarter refiner margin back above USD 7.00 per barrel from USD 5.00 in the June quarter.

We continue to see limited long-term implication in current weaker earnings, reflecting 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. We think these metrics will favourably trend nearer to longer-term averages and Z's infrastructure advantage should see it weather the current storm as well as any.

The company reported a 29% decline in first-half fiscal 2020 adjusted replacement cost NPAT to NZD 44 million. Intense retail fuels competition adversely impacted trading. We exclude an NZD 35 million pretax impairment to the Flick Electric investment which lost customers due to high spot prices. Regardless, the overall result was below our expectations and we downgrade our fiscal 2020 adjusted replacement cost NPAT forecast by 20% to NZD 148 million. That said, a material portion of the downgrade reflects higher depreciation and interest after the new accounting standard bringing operating leases on balance sheet.

Despite a poor first half, Z reaffirmed full-year fiscal 2020 earnings guidance for EBITDAF of NZD 390-430 million with dividends to be in a range of NZD 48 to 50 cents per share. The company qualified the bottom of the range indicates no change in Retail margins from the August to October actuals, with the midpoint dependent on an improvement on recent months. We marginally reduce our fiscal 2020 EBITDA forecast to a guidance lower-end NZD 400 million from our prior NZD 410 million estimate.