Transport fuels distributor and retailer Z Energy's [NZX: ZEL] success in raising margins on petrol and diesel sales is under pressure and are "likely to trend toward the industry's lower net margin," says Deutsche Bank analyst Grant Swanepoel in a research note on yesterday's full year result from Z.
The Wellington-based company, which took over the refining, distribution and retail operations of Shell New Zealand in 2010 and listed on the NZX last year, reported earnings before interest, tax, depreciation and amortisation of $219 million for the year to March 31.
While that was ahead of last year's prospectus forecast of $207 million, the apparent outperformance was "just a modest beat, or near top end of guidance", once operational costs were adjusted for abnormal impacts, Swanepoel said.
Z reported fuel margins improved from 15.8 cents per litre to 17.1 cents per litre, ahead of a target 16.5 cents per litre, while accepting some loss of market share, which now sits 2 percent above where it was when Z was formed.
"Management indicated that it is now responding to the competitor discounting strategies, which it refers to as tactical discounting," the Deutsche note says. "So far, while still early days, this has seen little change in competitive behaviour. A best outcome would be that competitors will stop the retail discounting.
"However, we expect that all it means is that Z's margin at the pump will slowly trend toward the industry's lower net margin."
Deutsche maintained its 'hold' recommendation on Z, targeting a share price of between $4.08 and $4.11.
The company's shares gained 1.8 percent to $3.90 in early trading on the NZX today, having initially fallen slightly to $3.87 after yesterday's result announcement.
"The one metric that could cause a surprise on the upside over the 2015 financial year would be if the industry pushes the gross petrol margin, as reported by the Ministry of Business, Innovation and Employment, up another few cents per litre," said Swanepoel's note.
"We are forecasting just a 0.3 cents per litre rise over the year after a 2.6 cents per litre over the 2014 financial year."