Investors should wait until after Z Energy float to buy shares at a lower price, Morningstar says

Investors would be better to wait until after the Z Energy float to buy shares in the petrol station chain as volatility in the sector means the price is likely to slip in the future, according to research house Morningstar.

Z Energy, owned by infrastructure investor Infratil and the New Zealand Superannuation Fund, will list on the New Zealand stock exchange on Monday, with the issue price via a book build expected to be between $3.25 and $3.75 a share. That is higher than the $3 fair value calculated by Morningstar senior resource analyst Mark Taylor.

"Volatility in the sector, often driven by the swings in fortune of large and irregular shipments of crude and refined products required, means there is a good chance of a better entry price at some time in the future," Morningstar's Taylor said in a research note. "Don't subscribe to the share offer, better entry opportunities may present later."

The bookbuild to set the share price is scheduled to start tomorrow. The offer is made up of a retail offer to broking firms and staff and an institutional offer. There won't be a public pool.

Z Energy's listing allows Infratil and the NZ Super Fund to realise a portion of their investment in the assets they bought from Shell three years ago. The investors, who currently each own a half stake in Z Energy, will retain a combined 40 percent to 50 percent in the listed company.

"Z has many favourable attributes that will make it an attractive investment at the right price," said Morningstar's Taylor. "But at the end of the day, this is a risk/reward game, and the vendors are likely to be taking their rewards for risk, and then some."

Taylor said his fair value estimate for the shares suggests a high fiscal 2014 dividend yield of 7.3 percent, reflecting relatively benign economic conditions and an unsustainable 84 percent payout ratio.


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7 Comments & Questions

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Crumbs! The article puts others onto my dastardly plan, possibly foiling it completely!


Why do people listen to Morningstar. They put a 'stay clear' rating on the Fonterra IPO and a buy on MRP.


A Morningstar negative view should be viewed with considerable suspicion. They have consistently recommended their clients sell their Ryman shares despite outstanding performance in price and earnings. They also valued Fonterra at $5.50 (it's traded around 25-35% higher on average than this). ASB Clients relying on Morningstar research would have been hurt by this bad advice.


I admire Morningstar because they don't give a stuff if people don't like their recommendations and don't let their arm get twisted by companies, potential investors, or market momentum.

Many other brokers simply reset their recommendations to suit the share price on any given day.

The fact is that the market is in a bubble at the moment. Valuations are far too stretched, the residential market is dizzying, etc. Share prices have rocketed over the last 18 months on no more than an expansion of earnings multiples, but not yet the underlying earnings or debt reduction.

So you would prefer Morningstar say "well based on the fact that the market is in a bubble and will keep going up you should also participate despite the fact current and future valuations are not supported by our fundamental analysis." A broker shouldn't recommend to clients that they participate in a ponzi scheme because a lot of the first people make money, even if the ones at the end dont.


The Z IPO is nothing like a ponzi scheme. It is a very solid business making a large amount of real money. Every other valuation I have seen, including my own, comes out higher than the Morningstar one. Morningstar are building in more risk to the business fundamentals than most others are. There is nothing wrong with that approach per se - you have to take a position on what level of risk there is - but I don't agree with the assessment in this case. Z is returning a fantastic dividend and in my view will continue to do so. Way better than MRP, for example. This is not a Xero, it is paying a real solid return which is demonstrably supported by fundamental analysis. If you look at it, the 'bubble' is in a few stocks like Xero. Take those few outliers out and most of the market is not far from the fundamentals.


Oh, I think a track record in research is useful when assessing future value. Morningstar's track record is woeful on some of NZ's biggest companies. They are viewed with derision by many investors.

This is why your ridiculous comments over "Ponzi schemes" and "bubbles" is completely wrong regarding the example I gave, being Ryman, who is expanding revenue, earnings and cashflow at a merry pace, has massive growth on the way, and a track record in successful business execution.

Still, a stopped clock is right at least twice a day.


I am an ASB client, and I also find the Morningstar's recommendations are very poor.


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