High margins boost New Zealand Refining

By Duncan Bridgeman

Friday 3rd September 2004

Companies that are price takers rather than price makers often struggle to deliver consistent results.

New Zealand Refining is one such company.

The good news for shareholders is that the company is going gangbusters at the moment.

Reporting a first-half profit of $34.3 million twice that of last year was in line with analysts' expectations.

What pleased the market most was the strength in the company's margins.

Refining margins have traditionally been the bane of NZR's life, as it has no control over its major input cost, crude oil, whose price is ever volatile.

But thanks to the recent high crude oil prices, refining margins have been running at record levels with a 60% increase in average US dollar terms for the six months to June 2004 over the previous corresponding period.

In New Zealand dollar terms the average margin was up almost 35%, helping drive up refining income by $23 million or 30% on the first half last year.

The company is implementing a $180 million Future Fuels project, which it expects to have completed by September 2005. This is to meet new product specifications due to come into effect in January 2006.

As a result borrowings are set to rise to about $80-90 million by the end of the 2004 financial year.

Despite this, the company has been willing to keep its dividend payout ratio high, declaring a $1 a share interim period dividend.

First NZ Capital believes the company will continue to maintain this policy while refining margins are strong and has lifted its full-year dividend forecast from 50c to $1.60 a share.

It has also raised its full year net profit forecast 25% to $53.8 million.

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