Z Energy's growth potential questioned

Last updated 05:00 27/07/2013

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Petrol station chain Z Energy's upcoming listing on the New Zealand stock exchange is expected to bring diversity to the range of companies on offer and give investors steady earnings, but there are concerns about growth.

Z Energy is seeking to raise up to $900 million in a dual listing offered to investors here and in Australia, with trading expected to start on August 22.

Grant Williamson, of Hamilton Hindin Greene, said it brought "something a little different" to the market, offering diversity as the only gas station company on the NZX. He described the indicative price range of between $3.25 and $3.75 per share as attractive.

"Looking at the fundamentals they are forecasting it is going to be an extremely good income stock offering an attractive dividend yield of 8 per cent and over, so certainly from that point of view I would imagine there would be significant retail investor demand."

Z Energy saw revenue fall 6 per cent to $2.9 billion in the year to March and its market share fell from 32 per cent in the 2012 financial year to 30 per cent in 2013.

"Growth is the difficult part," Williamson said. "They'll have to pick up market share if they do want to continue to grow, so certainly the projections don't show a lot of growth in there, that's why I think it's going to be viewed more as an income stock.

"Margins are always a risk and the higher the price of oil goes, the consumer will try and cut back as much as possible."

Brook Asset Management senior analyst Brooke Bone agreed there were a few fishhooks, around declining mileage and customer visits.

"But they have a very good management team that has been put in place and they are very New Zealand-centric," he said.

Z Energy emphasises using local food suppliers after extending its food and drink selection offering. Z stocks Goodtime Pies from Hawke's Bay, Petal Cupcakes from Auckland and uses its own brand of coffee.

It spent millions re-branding and plans to direct another $95m-$100m into capital expenditure in the current financial year, eyeing new properties and expansion of its customer offerings.

Part of the re-branding from Shell included adding a forecourt concierge service. It engages the 142,000 customers who ‘like' it on Facebook through initiatives such as stocking a limited run of specialty pies in store, then encouraging fans to vote for their favourite. The winning product makes it into the pie warmer permanently.

Z Energy stock would be reasonably high-yielding with a small amount of growth, Bone said, and was likely to have a place in the portfolios of investors looking for yield.

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"If you compare this towards the property companies or listed electricity companies, it's kind of in that sector of the market."

He expected some interest from Australian investors who would see the scale of the business as small but would have a good understanding of the sector, with Caltex listed across the Tasman.

Z Energy is owned by Infratil and the New Zealand Super Fund, which bought Shell New Zealand in 2010 for $696.5 million. Both shareholders will reduce their joint stake to between 40 per cent and 50 per cent as part of the float.

- BusinessDay.co.nz

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