Z Energy a buy as fuels sector competition sags, Deutsche Bank says
Z Energy [NZX: ZEL] is on track to beat its pre-float prospectus earnings forecasts and is rated a "buy" up to $4.21 a share, says Deutsche Bank, a lead manager in the mid-August Z listing whose research is now public after a statutory "black-out" period.
Z shares closed yesterday at $3.81, compared with the issue price at listing on Aug 19 of $3.50. Brokerage Forsyth Barr, which was also a lead manager in the Z listing, rated the stock a "hold" with a 12-month target price of $3.80 in a report last week, saying the shares are fully priced.
Driving its short term expectation of outperformance is a jump in importer margins reported by the Ministry for Business, Innovation and Employment to 29 cents per litre, although Deutsche says it expects "the current easing of the competitive environment is long term unsustainable."
It expects importer margins to slip back to around 25cpl by the 2017 financial year, but in the financial year Z should overshoot its prospectus forecasts by $8 million on an earnings before tax, interest, depreciation, amortisation and value of financial instruments basis.
"Each 1 percent change in the margin expectation has circa 27 cents (per share) impact on valuation," senior Deutsche analyst Grant Swanepoel said in a note.
Deutsche calculates that the importers' margin translates to a group fuel margin of 16.9cpl for Z, compared with a prospectus forecast of 16.5cpl.
"We do, however, moderate the company's petrol growth expectations for the 2014 financial year, but still anticipate a material beat of the prospectus forecast," said Swanepoel.
Z chief executive Mike Bennetts told BusinessDesk earlier this month that the company was undertaking a four to five year strategic plan, which he expected would be finalised by the Z board later this year, following implementation of the three year plan undertaken since the company emerged from ownership by Shell NZ.
He said then that "about a third of our sites are off the generally advertised pricing," reflecting competitive discounting. However, aggressive discounting through supermarket dockets seen earlier in the year, when Mobil took over docket schemes previously run with BP, had dried up in recent months.