Yovich & Co. Weekly Update - 9 March 2015

Mar 9, 2015 | Commentary

Changes in Market

 

  

 

 This Week’s Themes

  • Modest gains were made on the NZX last week, in contrast to falls in most other markets offshore. Increased volumes were seen in a few stocks that were included in the FTSE All World Index. Mighty River Power was added to the index and saw its share price increase by 3.9% after the announcement.

  • Australian investors were sluggish after economic data showed that GDP growth was lower than expected. After surprising the market last month with a drop in the official cash rate, the RBA kept rates steady at their meeting last week.

  • There were some large swings in sentiment in the U.S with the NASDAQ reaching all time highs early in the week and trading over 5,000 for the first time. However, at the end of the week, markets were in the red after the market fell on positive news that 295,000 jobs were created in February. This was significantly better than expected and investors reacted negatively on the concern that this might speed up the Federal Reserve’s plan to increase interest rates.

  • The possibility of a rise in interest rates in the U.S. saw the New Zealand Dollar fall against the Greenback and the Aussie.

Investment News

The New Zealand Refining Company (NZR.nz) – FNZC Reinstates Coverage on Turnaround in Margins.

Late last year First NZ Capital ceased research coverage on New Zealand’s only Oil Refinery as the market cap fell below $500 million and the share price slumped on poor margins. The turnaround in margins this year has been swift, helped by the rapid fall in the oil price, improving volumes of refined product and a subsequent rise in the Singapore Complex margin. FNZC has reinstated their research coverage with an out perform recommendation and $2.91 price target. The main points in their research report are:

 
  • NZR is a cyclical stock and as such it is difficult to roll forward trading multiples. Keeping this in mind, NZR are trading at a significant discount to other comparative refineries:
    • 12.8x P/E vs 7.5x for NZR and 10.7 x EV/EBITDAF vs 4.8x for NZR.
  • Gross Refining Margins are estimated to be between US$10/bbl and US$11/bbl for Jan/Feb 2015,
    • In Sep/Oct 2014 the Gross Refining Margin was US$3.75/bbl
  • FNZC have modelled that the Full Year 2015 Gross Refining Margin will be US$8.50/bbl,
    • Margins towards the end of the year are expected to drop towards $US4/bbl.
  • The Te Mahi Hou CCR project is on track to be completed at the end of 2015. This will add almost US$1/bbl to the margins in 2016.
  • Debt repayment will take a front seat over the next few years while gearing is reduced to below 20% but they think that there is a good chance that the Dividend will be reinstated in the second half of 2015.
  • Continued benefit from a devaluing New Zealand Dollar vs the U.S. Dollar.

 Financials

 

 

 

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Jarrod Goodall



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