There is an old Aussie saying that New Zealand is about ten years behind Australia. In terms of its car fleet, that is not inaccurate. The acquisition of Z Energy is now complete, and it adds significant amounts of free cash flow to Ampol’s business, so it is a very good deal.
The average age of the New Zealand car fleet is about 15 years old, with about 60% of annual car sales being 10-year old used imports, mostly from Japan. That 10-year old Toyota Corolla runs on unleaded petrol and New Zealand is likely to need its servos to keep pumping the old stuff for many years.
That makes Z Energy an extremely capex-lite business and therefore it spills out a torrent of free cash flow. New Zealand’s sole refinery at Marsden Point is being converted to an import terminal so the roughly 4 billion litres needed to keep kiwis cars moving will now come from Singapore. ALD is targeting about A$60-80 million of synergies by the end of year 3.
Refining margins are at very high levels currently and this could allow net debt to EBITDA to fall below 2x in quick time. It seems fairly obvious that ALD, supercharged by Z Energy, will have the ability to consider capital returns for a very long time.
Investment view
There are some accounting gymnastics required to bring Z into ALD’s numbers so the true picture is yet to emerge. But that does not detract from the likelihood of Z being at least 20% earnings accretive for ALD.
More generally, retail fuel consumption in Australia is still recovering from Omicron and the surge in pump prices due to events on the other side of the world. Aviation fuel demand is still recovering, and retail performance will gain from a more consistent merchandising offer and better store operation.
Refining margins are substantially ahead of consensus and retail margins are hitting ~20cpl in April, so the earnings risk appears on the upside for ALD.
With government support for refining in Australia, a clear elongation of demand for petroleum fuels and an improving retail business, there are sound reasons for owning ALD even before considering the abundance of free cash flow about to inundate the company. These factors are not reflected in the share price, in our view.
Risks to investment view
Crude oil price volatility could affect refining margins and retail earnings through a fall in consumption of fuels. Government fuel security package support could change leaving ALD once again exposed to volatility in refining margins.
Recommendation
We have retained our Buy recommendation.
