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FNZC cuts target price but maintains dividend hopes for Z Energy after downgrade

Wednesday 24th January 2018

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First NZ Capital says it's plausible Z Energy's downgraded guidance is due to one-off factors and maintained its dividend expectations for the stock, but has trimmed its target price for the stock. 

Yesterday, Z cut its annual guidance by about $20 million following a weaker-than-expected performance in the December quarter, due to a shutdown of the New Zealand Refining fuel pipeline to Auckland and the rising price of crude oil. The company said replacement cost operating earnings before interest, tax, depreciation, amortisation and fair value adjustments (ebitdaf) will be between $430 million and $455 million in the year to March 31, down from a previous range of $445 million-to-$475 million. 

In a research report for clients, FNZC today downgraded its target price to $7.70 from $7.79, revised its 2018 ebitdaf forecast to $443 million from $464 million, and maintained its 'neutral' rating on the stock. It kept its full-year dividend expectations unchanged at 32.3 cents per share, as it said near-term cash flow and net debt should benefit from the rising price of crude.

"Further supply disruptions and rate of crude cost increase lead to guidance downgrade, but both factors look unlikely to reoccur in FY19," FNZC analyst Nevill Gluyas said. "Continuing crude price rises beyond March 2018 would take oil outside global consensus price forecast ranges, and the domestic supply situation looks to be restored with the Refinery Auckland pipeline back in service and operating at higher throughput rates."

FNZC's outlook for Z is gloomier than the general consensus, with six analyst recommendations compiled by Reuters holding an average 'buy recommendation' with a median target price of $8.40. 

Yesterday's third-quarter data showed retail petrol sales from both Z and Caltex sites fell 4.7 percent to 307 million litres, which FZNC said was 5 percent lower than its forecast of 322 million litres, though Z has attributed the decline to Commerce Commission-mandated station divestment last year. Retail diesel sales, at 120 million litres, were up 2 percent from FNZC's prediction. 

FNZC said top-of-cycle fuel margins and likely regulatory review create downside risk, but robust near-term earnings and an attractive dividend yield support Z trading near the upper end of its valuation range "unless (or until) the medium-term risks become more concrete."

Z stock last traded at $7.52, virtually unchanged from this time a year ago when was trading at $7.50. The stock climbed as high as $8.04 in late 2017 but has dropped back, and fell 2.3 percent yesterday on the downgrade news.


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