Wednesday 5th September 2018
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Z Energy appears to have paid a full price for its 70.1 percent stake in start-up power retailer Flick Electric without a clear path to making "a return on its (substantial) investment that will be material to its business," says Woodward Partners energy analyst John Kidd in a note to clients, published this week.
"Synergies between the businesses are not obvious and if there are any, the deal value would appear as though Z has paid for (rather than realised) the benefit of those synergies," said Kidd of the $46 million deal announced on Aug. 27.
Z shares have fallen steeply since the announcement. Having closed at $7.40 a share on Aug. 24, they fell to $7.29 on the day the deal was announced and have declined since to close at $7.06, a drop of 8.9 percent over the last year.
"On face value, ... the deal leaves us much less convinced as a Z investor," Kidd wrote, while describing the outcome as "an outstanding outcome for Flick investors, with a six-fold return on early money achieved over a four-to-five year timeframe".
Flick began operations in 2013, offering to charge customers the wholesale price of electricity plus an administrative and profit margin that Kidd says comes in at a gross margin of around 15 percent. Customers accept their power bills will fluctuate with wholesale market conditions and have largely benefited from historically low wholesale electricity prices over the last six years - a period in which there has been excess electricity supply and very little growth in national demand for electricity.
Z positioned the purchase as part of its response to the long-term trend away from the use of fossil fuels to produce energy.
Flick has around 24,000 customers, according to Electricity Authority figures, making it a minnow in a market where the largest retailer, Genesis Energy, has more than 520,000 customers.
"While there will always be space for 'upstart' niche brands in a crowded market, success must ultimately be a function of scale," said Kidd.
"More broadly, we continue to be unconvinced by Z's long-term strategy to address the future terminal decline of its core liquid fuels business. There are many options for Z to leverage its asset portfolio and leading market position to position itself to remain at the centre of the mobile energy sector for the very long term."
The Flick acquisition and a recent stake taken in start-up shared electric vehicle firm Mevo aimed at the mass market, but the biggest opportunities were in the heavy transport sector "that provides the backbone for current fuel demand and is the space that we think presents the biggest opportunity Z."
However, Z's "only meaningful step-out" into heavy transport initiatives is its Wiri bio-diesel project, which Kidd said was "in our view, another unconvincing investment".
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