Headline margins on imported diesel and petrol have continued to climb against expectations, leading Forsyth Barr to upgrade its target price on fuel retailer Z Energy.
Forsyth Barr broker Andrew Rooney said the Ministry of Business, Innovation and Employment (MBIE) importer margins rose 10% over the past three months to 40c per litre for diesel and 35c per litre for regular petrol.
New Zealand Refining margins had remained ''relatively strong'', although Singapore benchmark margins were softening.
''With the refinery providing a competitive advantage over imported product, we expect Z Energy will be having a record third quarter.''
However, offsetting the rosy picture slightly was anecdotal evidence deep daily discounts were becoming more common, he said.
That, coupled with BP raising its Smartfuels discount back to 6c per litre from 4c per litre, suggested industry-wide discounting had again increased.
From a volume perspective, Z Energy was continuing with its plan to match competitor discounts, meaning volumes were holding up well.
Mr Rooney expected the third quarter to show improved volumes had been sold.
Z Energy was targeting a return on capital of 15% but what had not been tested was whether the regulator (the Government) believed that was an appropriate return, he said.
The company would want to ensure margins were not allowed to increase to a point where the industry became regulated.
Recently, Energy Minister Simon Bridges indicated he was looking into margins, suggesting the Government was in the early stages of reviewing the appropriateness of the increase in sector margins, Mr Rooney said.
The stronger margin outlook led Forsyth Barr to increase its operating profit by $7 million to $245 million which was now towards the upper end of Z Energy's guidance range.
The flow through to stronger long-term profits meant an increased share target price of 20c per share to $4.65.
''Nevertheless the share price has risen even more over the past few weeks, to the point where we see limited upside.
Margin growth appears limited from here and after Z Energy has benefited from the current surge in fuel margins and New Zealand Refining's capex project is completed, achieving earnings growth will be challenging.''
Z Energy appeared to be fully valued and Forsyth Barr had reduced its rating to neutral from outperform, Mr Rooney said.
