Morningstar cuts earnings forecast for Z Energy but maintains hold rating

Morningstar cuts earnings forecast for Z Energy but maintains hold rating. Photo: John Sefton

Morningstar Research lowered its fiscal 2019 earnings per share forecast but kept its hold rating on Z Energy after the country’s biggest fuel retailer downgraded its profit outlook amid a longer-than-anticipated shutdown of a local oil refinery and as high oil prices hurt demand.

On Wednesday Wellington-based Z said it is now forecasting operating earnings of $420 million-to-$455 million for the year through March 2019, down from previous guidance of $450 million-to-$485 million in earnings before interest, tax, depreciation and changes in financial instruments.

As a result, Morningstar cut its forecast for Z’s underlying fiscal 2019 earnings per share by 6 percent to 55 cents, "assuming the $440 million EBITDA guidance midpoint is achieved,” analyst Mark Taylor wrote in a July 18 note.

Even so, Taylor maintained his $8 per share fair value estimate for Z, as well as his fiscal 2019 dividends per share forecast of 54 cents, he wrote.

"While disappointing, coming on the back of our recent fair value upgrade, we don't view the drivers as long-term," Morningstar’s Taylor said.

“Rising crude prices have negatively impacted Z's earnings due to the lag between when product sales are priced relative to the input costs," Taylor noted. "The reverse is true in a falling crude environment, as our unchanged midcycle US$50 Brent crude forecast predicts versus current US$72 per barrel spot. Hence our comfort recent earnings detractors are short-term in nature."

The shares last traded at $7.17, bringing their decline for the past year to 4.4 percent.