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Z Energy lifts dividend as Caltex contributes to 22% gain in first-half profit, increased volumes

Thursday 10th November 2016

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Z Energy raised its first-half dividend as the service station operator posted a 22 percent gain in earnings and a 57 percent jump in fuel volumes following its acquisition of Chevron New Zealand's Caltex and Challenge! brands.

Profit rose to $82 million in the six months ended Sep. 30, from $67 million a year earlier, the Wellington-based company said in a statement. Sales climbed to $1.66 billion from $1.3 billion.

Last month, Z Energy said it had identified $10 million to $15 million of additional savings from the integration of the Caltex and Z businesses, bringing the total to be achieved in the 2018 year to between $40 million and $45 million. The transport fuel company bought the Chevron assets for $785 million this year, making it the country's biggest petrol retailer, with about 49 percent of the retail transport fuels market. Today it lifted its guidance for 2017, saying it was far enough into the integration to make a more accurate assessment.

"Obviously the majority of these increases in profit arose from the Caltex business," chief executive Mike Bennetts said in the company's first-half report. "However, the underlying business benefited from growth in marketing volumes (albeit less than industry growth), flat fuel margins and continued growth in convenience store sales. These elements were offset by the expected decline in refining margins which were 38 percent lower than the record levels of last year."

Z Energy will pay an interim dividend of 9.4 cents a share on Dec. 12, up from 8.5 cents a year earlier. Its shares last traded at $7.41 and have gained 9.6 percent this year, outpacing a 5.4 percent rise in the S&P/NZX 50 Index.

The company raised its guidance for full-year earnings, based on replacement cost operating earnings before interest, tax, depreciation and financial adjustments to a range of $385 million to $415 million. The projection excludes one-off integration expenses of $34 million, includes $12 million of synergies and the effect of reduced earnings from divestments of $4 million, it said.

As part of its approval for the Caltex purchase the Commerce Commission required Z Energy to divest 19 retail sites and one truck stop. Sales agreements have been signed for all the sites, it said.

Robberies at Z Energy service stations jumped to 15 in the first half from just two in the same period last year, which Bennetts attributed to the rising cost of tobacco, and the company has embarked on a strategy to boost site security.

"The bigger question that could well be asked here is why Z simply doesn’t stop selling tobacco," Bennetts said. "The answer is that up to 15 percent of our customers choose to purchase and use what is a legal product." Still, the company supported the government's Smokefree 2025 programme and was looking at how to "move away from tobacco in a way which supports and advantages the underlying business."

Fuel volumes rose 3 percent to 1.66 billion litres in the first half, with the growth driven by a 3 percent gain in diesel volumes and 11 percent gain for other fuels, which made up for a 1 percent decline in petrol. Z Energy's unit margin of 18.2 cents per litre was down from 21.3 cpl a year earlier and reflected "differing operating models and margin exposures between (the) Z and Caltex networks".

In its presentation material, Z Energy provided a chart of retail fuel discounting across the sector, which shows discounting typically accounts for more than 50 percent of volume sold. It said regional discounting could run to as much as 30 cpl and the company played its role in the competitive market. "Z branded sites continue with tactical pricing, including store promotions, discount days and expanded Z App offers," it said.

The company lifted non-fuel revenue by 6 percent, including a 15 percent gain in coffee sales, an 18 percent gain in food and 61 percent increase in "leisure" products. It recorded record carwash activity in August.

Z Energy's processing volume rose to 8.5 million barrels from 6 million a year earlier as a result of acquiring Chevron's New Zealand business. Its gross refining margin amounted to $25 million in the first half, from $24 million a year earlier.

BusinessDesk.co.nz



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