NZ tourism boom soaks up jet fuel supplies, seen widening margins

Wednesday 2nd November 2016

New Zealand's booming tourism is soaking up the country's excess supplies of aviation fuel, raising the prospect of higher margins from one of the least profitable products currently sold by the country's transport fuel retailers.

Analysis by First NZ Capital suggests that Z Energy, a major supplier of aviation fuel to Auckland International Airport, can expect a margin uplift of $20 million a year from the 2020 financial year onwards "on the belief jet (fuel) demand growth will make New Zealand a net importer and lift current low margins".

Because the total volumes consumed in New Zealand are also refined here and in quantities that exceed current total demand, the fuel costs less than on the international market.

If the country moved to become a net importer, that would likely shift the cost of aviation fuel to so-called "import parity", says FNZC.

"While Z is not yet certain of timing, this seems to be a circa two to three year window," says FNZC analyst Nevill Gluyas, in a research note following Z's recent investor day, where investors from around the world were present to hear updated presentations.

"We've previously estimated up to a $35 million p.a. increase of jet fuel margins should this happen, due to import parity pricing and opportunity cost as imported jet fuel displaces other fuels transported on constrained refinery-Auckland and Wiri pipelines."

Refining NZ, which runs the country's only oil refinery at Whangarei, is in the process of expanding pipeline capacity to Auckland by 15 percent, driven largely by growing demand for jet fuel caused by a rash of new long-haul services into Auckland from Asia and the United States. Official figures show the refinery produced some 8.3 million barrels of oil equivalent of aviation fuel in 2015.

Gluyas added $9 million to his forecast for Z's earnings before interest, tax, depreciation and amortisation in the the current financial year, to $391 million - understood to be at the high end of the new round of forecasts emerging from investment houses following the investor day, which attracted international as well as domestic institutional shareholders to Wellington late last month.

However, FNZC maintains a 'neutral' rating on the stock, which was trading late today at $7.73 and has risen 14.6 percent this year, and gives a target share price of $8.25, well below the $9.20 per share target identified by new Forsyth Barr analysis, which is less bullish than FNZC about the locally owned fuel distributor's earnings outlook.

FNZC notes that Z is expecting an additional $15 million a year of synergy benefits from its takeover of the New Zealand downstream assets of Chevron, principally the Caltex chain of fuel outlets.

The report, however, notes Z's own warnings on the potential for electric vehicles to sap its long term earnings outlook from traditional transport fuels.

"The company left us in no doubt that it regards vehicle electrification as 'inevitable'," the note says, describing the outlook as "sobering".

Z produced two scenarios, for fast and more moderate uptake of EVs, with FNZC regarding the fast uptake scenario, in which its spot discounted cashflow valuation of Z shares would plummet to $4.77 per share, as "highly unlikely".

"There isn't yet any political impetus for the sort of extreme and swift regulatory intervention anticipated" in the scenario Z adopted.

FNZC's lower impact scenario renders a spot-DCF valuation of $8.28 per share.

BusinessDesk.co.nz

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