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Morningstar Equities Research

Morningstar Equities Research - ZNZ, ZEL-NZ, WFD, POT-NZ and BKN, BKW, NHF, PFL on price change

Z Energy Limited ZNZ, ZEL-NZ | Z Energy Weathers Reduced Second-Half Fuel Volumes, Fair Value Edges Higher

Morningstar Recommendation: Reduce
Mark Taylor, Morningstar Analyst -

Z Energy shares have drifted in the vicinity of NZD 3.90 during the past four months, still at a slight premium to our upgraded NZD 3.60 per share fair value estimate, previously NZD 3.40. Most of the fair value increase is simply the time value of money. The balance reflects a tempering in forecast unit fuel costs, given the favourable fiscal 2014 outcome, partially offset by a mild decline in expected New Zealand fuel volumes. Z Energy reported a 27% decline in fiscal 2014 Replacement Cost NPAT to NZD 101 million, 7% below our NZD 109 million forecast and marginally below the company's NZD 105 million prospectus forecast. But that outcome reflects lower-than-expected fuel volumes, down 3% to 2.4 billion litres versus our 2.5 billion forecast. Fuel costs came in at a favourably lower than expected NZD 0.92 per litre.

Our fiscal 2015 earnings forecast is marginally softer at NZD 110 million. Our fiscal 2016 earnings forecast is NZD 147 million, higher in anticipation of an improvement in retail margins from 23.5% to 25%; with procurement and portfolio optimisation the expected driver.

Z Energy has driven returns on invested capital admirably back above its cost of capital and, longer term, we forecast double-digit returns on invested capital; healthy, but not sufficient, to drive a moat. The company has a sizeable position in the New Zealand retail commercial fuel market, but it is not alone in this regard. Also, it must compete against multinationals with large balance sheets and different economic imperatives. The New Zealand market is dominated by four major players including Z Energy.

We consider Z Energy's fair value uncertainty is high. The small New Zealand retail and commercial transport fuel market is regularly subject to intense price competition for market share. Z Energy's business requires large irregular shipments of crude oil and refined products and corresponding requirements for working capital.

Westfield Corporation WFD| Westfield Group Loses the Australia and New Zealand Operations to Become Westfield Corporation

Morningstar Recommendation: Accumulate
Tony Sherlock, Morningstar Analyst -

We initiate coverage of Westfield Corporation, which has been formed after Westfield Group demerged its Australian and New Zealand operations. These operations were combined with Westfield Retail Trust's property investments to create Scentre Group.

Our fair value estimate for Westfield Corporation is AUD 8.00 (based on an Australian dollar/U.S. dollar exchange rate of 0.90). We consider the stock slightly undervalued, trading about 10% below our valuation. The proforma 2014 distribution of USD 24.6 cents (AUD 27.3 cents) offers a yield of about 3.8% based on the current security price. The modest yield reflects a payout ratio of 65% as the business retains cash to fund its substantial development pipeline.

We expect Westfield to generate solid rental growth over the medium term as U.S. and U.K. economies gradually recover, resulting in higher consumer spending and rent growth. Westfield's USD 9 billion development pipeline should generate solid development earnings over the medium term, with major projects including the World Trade Centre, New York and Century City, Los Angeles. However, growth in funds from operations (property earnings), should be relatively modest at about 4% per annum, reflecting to the negative effect of rising interest rates.

We believe Westfield has a narrow moat, with the moat sources being efficient scale and some network benefits. It focuses on malls in built-up locations giving rise to efficient scale benefits and entry barriers because of difficulties in sourcing land and permitting. The high patronage at its large-style malls often gives rise to network benefits. High customer numbers attract more businesses and often lead to councils upgrading transport routes. This gives rise to a virtuous cycle, where the growth in patronage makes it compelling for the landlord to further increase the mall footprint (often building up) which further strengthens the positioning of the mall in the catchment.

Port of Tauranga Limited POT-NZ| Kotahi Deal Significantly Increases Dairy Shipments from Port of Tauranga and Provides Future Upside

Morningstar Recommendation: Reduce
Nachiket Moghe, CFA, Morningstar Analyst -

We lift our fair value estimate for Port of Tauranga to NZD 14.00 per share from NZD 13.00 per share following the recent alliance struck by the company with freight and logistics management company Kotahi. In our view, the alliance will result in higher revenues and earnings for the company driven by increased dairy shipments through the port. We have revised our longer-term forecasts to reflect the increase in dairy volumes once bigger ships start calling at Port of Tauranga. Our 2014 and 2015 forecasts remain broadly intact.

Our wide moat rating on the company remains unchanged, reflecting the low cost structure, high productivity and excellent road and rail connectivity to and from the port. The alliance with Kotahi further strengthens the firm's competitive position as it will be the only port in New Zealand to attract bigger ships. It also reinforces our thesis that, going forward, cargo consolidation in New Zealand is inevitable and Port of Tauranga will be the biggest beneficiary of this consolidation.

Patties Foods - Downgrade due to price change

NIB Holdings - Downgrade due to price change

Bradken - Downgrade due to price change

Brickworks - Downgrade due to price change


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