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Z first-half profit climbs 10% as Chevron acquisition drives sales; margins shrink

Thursday 9th November 2017

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Z Energy lifted first-half profit 10 percent as the acquisition of Chevron New Zealand's retail network swelled sales, even as retail margins shrank from what the transport fuels company described as the top of the cycle. 

Net profit rose to $80 million, or 22 cents per share, in the six months ended Sept. 30 form $73 million, or 18 cents, a year earlier, the Wellington-based company said in a statement. Sales climbed 26 percent to $2.09 billion on a 13 percent increase in the volume of fuel sold to 2.1 billion litres, although margins shrank to 17.3 cents per litre from 18.2 cents a year earlier. 

On Z's preferred measure, which strips out the changes in the value of inventory, replacement cost operating earnings before interest, tax, depreciation, amortisation and fair value adjustments rose 19 percent to $221 million reflecting a full six-month contribution from Chevron compared to just four months a year earlier, The company affirmed annual guidance on that basis to be between $445 million and $475 million. 

"We've seen softer contribution from the retail business as retail margins appear to be at the top of the cycle, while the commercial business has improved both volumes and margins," chief executive Mike Bennetts said. "Z's strength across the supply chain has also contributed to the result due to greater economies of scale."

Z is embarking on a new long-term strategy as it beds in the Chevron assets more quickly and efficiently than it had initially anticipated, which will let it repay debt taken on for the acquisition earlier and start paying larger dividends to shareholders. 

The board declared an interim dividend of 10.4 cents per share, payable on Dec. 12 with a record date of Nov. 24, up from 9.4 cents a year earlier. From 2019 the company plans to pay 80-to-100 percent of free cash flow in dividends, which it expects will deliver "a material increase" while enabling it to keep reducing debt. Operating cash flow rose to $185 million from $131 million a year earlier, while capital spending was a net $27 million in the period. 

Net debt shrank to $960 million, or 2.1 times underlying earnings, compared to $1.09 billion, or 2.6 times earnings a year earlier. 

Bennetts said the company made a submission to the Ministry of Business, Innovation and Employment last month about the fuel market financial performance study, saying it wasn't concerned about a potential inquiry into the possibility of a borrow and loan registry and more liquid wholesale market. 

"However, given New Zealand's fuel supply has become more and more efficient over the last 30 years, any changes would need to be very carefully considered in order to avoid unintended negative consequences," he said. 

The company hasn't talked to new Energy Minister Megan Woods about the work yet. 

The shares last traded at $7.20 and have declined 0.8 percent this year. 


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