Z Energy lifts annual net profit 8% on extra Caltex contribution

Rising diesel sales offset declining petrol sales.

Z Energy’s net profit rose 8%, although its preferred replacement cost result was up 16%, reflecting an extra two-month contribution from the Caltex business and an 18% jump in crude oil prices.

The petrol station operator reported a $263 million result for the year ended March, up from $243m the previous year.

The replacement cost result of $205m was up from $176m the previous year.

“We have delivered a financial benefit of $39m in full-year 2018 as a result of the synergies obtained from our increased scale and the business choices we’ve made since acquiring Caltex nearly two years ago,” chief executive Mike Bennetts says in a statement.

Z’s strategy 3.0 “which focuses on a more productive core business, has delivered $5m ebitdaf (earnings before interest, tax, depreciation, amortisation and financial instruments) in its first year of execution,” Mr Bennetts says.

"This is in line with previously stated guidance and on track to realise $35-40m of earnings uplift by full-year 2021.”

Cashflow for the year was up 55% to $396m and supported debt repayments of $75m, reducing the debt coverage to 2.1 times ebitdaf from 2.3 times a year earlier.

And the company has lifted its final dividend 10% to 21.9c per share, bringing the year’s payout to 32.3c.

“This reflects Z’s dividend policy of ‘better with you than us,’” the company says.

The industry's competitive pricing came under attack recently after a leaked BP email revaled its tactics to lower prices in areas without more competition and increase them elsewhere. A report last year had already found the country's petrol market may be uncompetitive and Z said today the most likely outcome of that fuel market study is a Commerce Commission market review once revelant legislaiton is passed later this year.

"In our view, a market review is likely to find a competitive market dynamic working effectively as demonstrated by the tension between volume and margin for existing participants, multiple new entrants investing capital due to the low barriers to entry, and customers have a wide range of choices for price and on price based offers," it said in the annual report.

It said the most intense discount areas have shifted out of high population trading areas in line with an increase in new sites from regional distributors.

Z reported a change in its volume mix of products sold, which it says was in line with changes in industry volumes. Growth in diesel sales offset the decline in petrol volume and the increase in “other” fuels was driven by a 13% increase in jet fuel volumes, it says.

From September Z will take over the Mobil fuel supply contract with Foodstuffs, cvering 53 New World and Pak'nSave branded service stations. No financial value was provided on the partnership, but Z said its 2019 financial year guidance reflects seven months of the financial contribution. The Z network will redeem New World and Pak'nSave supermarket dockets while both Z and New World will continue to participate in the Fly Buys and Air Zealand air points programmes. Caltex will continue to participate in the AA smart fuels loyalty programme.

The company says its non-fuel sales continue to perform well with Z-branded convenience stores lifting margin by 11% to $76m. Average weekly shop sales rose 5% on a like-for-like basis, with growth driven by promotional activity and new healthy food offers, it says.

The refining side
Its refining margin grew 33%, reflecting the optimisation projects Z has completed with Refining NZ and a 16% increase in processing volumes reflecting two extra months from Caltex (In the 2017 financial year, Z had a 10-month contribution from Caltex. In the 2018 financial year Z had 12 months from Caltex, that is two more months).

Average gross refining margins were up $1.49 a barrel.

That helped offset lower fuel unit margins, increased operational spending because of the damage to the refinery to Auckland pipeline and a price lag that affects commercial sales in a rising crude oil environment, the company says.

The fuel unit margin fell to 16.5c a litre from 17.4c, reflecting the change in product mix and growing retail loyalty costs in the retail business.

“In just the past two years, New Zealand has seen 60 new-to-industry sites built by competitors, effectively increasing industry capacity by 4%,” Mr Bennetts says.

Z is forecasting replacement cost ebitdaf for the current year will be between $450-480m and net capital spending of $60m.

Ebitdaf for the year just gone was $449m, 13% higher than the previous year.