Daily ShareChat: New Zealand Refining

By Jenny Ruth

Friday 28th January 2011

Upwards revisions to expected refining margins have led to upward revisions to his profit forecasts for New Zealand Refining, says David Oxley, an analyst at Deutsche Bank.

"The gross refining margin (GRM) achieved is NZR's key value driver," Oxley says.

While the company's actual GRM will differ from benchmark margins, its GRM is driven by similar underlying dynamics and is likely to mirror regional industry trends, he says.

Deutsche Bank has revised upwards its forecasts of the Singapore Complex Refining Margin to reflect a higher than anticipated result in the second half of 2010, primarily reflecting a more robust underlying demand environment and downward capacity adjustments.

Oxley is expecting NZR's net profit for calendar 2011 will be $92.6 million, up from his previous $81.3 million forecast, compared with an expected $64.5 million for calendar 2010.

As a result, he has moved his 12 month target price up to $4.61 from $4.15 previously.

"While NZR owns and operates a unique asset in New Zealand and appears relatively well positioned in an industry context, we consider it to offer a structurally above-average risk profile stemming from its relative lack of earnings visibility."

Although management provides "excellent levels of disclosure," earnings show a marked cyclicality, Oxley says.

Recommendation: Hold.

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