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Z Energy lifts profit 8% as government questions petrol pricing

Thursday 3rd May 2018

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Z Energy delivered annual earnings within its lowered guidance, with profits rising as the government looks more closely at pricing strategy in the fuel sector.


In the year to March 31, revenue surged 18 percent to $4.57 billion, from $3.86 billion a year earlier. Net profit rose 8 percent to $263 million, while replacement cost operating earnings before interest, tax, depreciation and financial adjustments - a measure Z uses to strip out the changing value of inventory - rose 13 percent to $449 million. That's within the guidance update it gave in January, which was cut by about $20 million due to the shutdown of the New Zealand Refining fuel pipeline to Auckland and the rising price of crude oil.


Chief executive Mike Bennetts said the company is forecasting replacement cost ebitdaf between $450 million and $485 million in the 2019 financial year, and $60 million in capital expenditure. Bennetts also said the company expects to pay a 2019 dividend of between 50 cents and 55 cents, equivalent to between 90 percent and 100 percent of free cash flow, if it hits the midpoint of that guidance.


The board declared a full-year dividend of 21.9 cents, up from 19.9 cents in 2017, bringing total dividends for 2018 to 32.3 cents. 


The fuel industry has come under fire this week after a leaked email from BP revealed that company's pricing tactics, prompting Energy Minister Megan Woods to call BP in to explain. The industry was already being scrutinised after a report by three independent economic consultancies for the Ministry of Business, Innovation and Employment (MBIE) released last July found New Zealand's petrol market may not be competitive, with retail margins increasing over the past five years while more expensive petrol in the South Island and Wellington aren't explained by higher costs in those areas.


Z today said that it thinks the most likely outcome of last year’s fuel market study is a Commerce Commission market review once relevant legislation 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 non price based offers," Z said. "The weighted average cents per litre discount declined in 2H FY18 driven by a reduction in the price spread, contrary to previous experience where spreads have expanded in a rising crude price environment. Most intense discount areas have shifted out of high population trading areas in line with an increase in new sites from regional distributors."


Z said that in the year, gains from continued strong refining margin and growth in non-fuel revenue had been offset by the impact of competitor discounting and one-off supply disruption costs and price lag. Fuel margins dropped in the year, to 16.5 cents per litre, from 17.4 cents per litre in 2017. It said this reflected the changing product mix and costs from its loyalty offers.


In 2018, Z sold 1.35 billion litres of petrol, which is 4 percent less on a like-for-like basis when adjusted as if the 2017 data included a full year of sales from its Caltex acquisition. Even using those adjusted figures, its diesel sales rose 4 percent to 1.64 billion litres in the year, and its other sales rose 6 percent to 1.15 billion litres, driven by jet fuel volumes. 


The company's monthly market share was at around 39 percent at the end of March, down from about 42 percent in March 2017, and Z said this was due to "unusual variations in competitor monthly sales data" reported through industry exchange. Some 60 new sites have been built by Z's competitors in the past two years, which the company said raises "concerns of over capitalisation leading into a period of uncertain long term demand".


Z announced today it will take over the Mobil fuel supply contract with Foodstuffs, which covers 53 New World and Pak'nSave branded service stations, from September. The company didn't put a dollar value on the partnership, but said its 2019 guidance reflects seven months of the financial contribution. 


The company's service station food offering lifted earnings in the year, with non-fuel margins rising to $76 million from $69 million a year earlier. Average weekly shop sales rose 5 percent, helped by sales growth from sandwich and pie campaigns along with healthy food offers, Z said. 


Looking at the long term, Z says petrol demand is tracking above the more optimistic scenarios developed by the BusinessNZ Energy Council. It said there are insignificant changes in the lead indicators of disruption and electric vehicle uptake continues to grow from a low base, and while battery pack costs are declining, pricing and availability compared to conventional engines "remains challenging."


The company's shares last traded at $7.30, and have dropped 5.6 percent in the past 12 months.



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