This is not investment advice and is general in nature. Do your own research before taking any positions in the securities listed below. You should consider your financial situation and goals before making investment decisions.
$CHI's transition from Refinery to Port
In Aug'21, $CHI closed down its refinery business in Marsden Point (at the expense of 240 jobs) for the following reasons:
The thin-margin business had steep losses during COVID-19 and a lack of air travel and other regions having more affordable refinery operations
NZ Petrol consumption is expected to Peak in 2027 as they move into EVs (albeit as I mention below there will be growth in Jet Fuel and Diesel as the electrification of non-passenger vehicles will take longer)
Any future shift to biofuels, a goal of NZ Gov, would be difficult as Marsden Point did not have an ample supply of feedstock (e.g. cornstarch, agriculture products)
$CHI want to reposition for private storage and perhaps hydrogen
The net impact of this transition was >30% uplift in share price
What is left now the refinery is closed?
Closing down the refinery still leaves you with a core asset:
Port: ITS handles 3-3.5 billion litres of transport fuels annually (via 2x jetty berths which are sufficiently deep for tankers). This is c.40% of New Zealand’s fuel demand
Storage: Stores fuel on behalf of bp, Mobil and Z Energy on a comingled basis (180M L shared terminal capacity post-conversion). In addition there is 120M L of private capacity
Distribution: They distribute fuel via the 170km multi-product pipeline that runs from Marsden Point to the Wiri Terminal (and Auckland Airport), or via a short pipeline to a trucking point. The Wiri Terminal is operated by a JV of BP, Mobil and Z Energy and is situated on land owned by Channel Infrastructure.
Why would you consider owning a port?
Whilst Marsden Point is not even close to the biggest port in New Zealand ($POT.NZ) and it is not in peak Auckland, it has the following going for it:
Few ports have deep birthing capability which are required for fuel imports
This port has direct rail to Auckland Airport and then onto Wiri
Useful life of >30yrs and it is on freehold land holdings (excluding Wiri land)
Take-or-pay arrangements with suppliers
What is next for the pure-play port operator & what's not in the price
Jet Fuel growth (Good): 2019 levels of Jet Fuel were c. 1.1bn litres (basically what we are expecting for 2023/24). So from here, they are expecting the following
Jet Fuel volumes grow at c.2.3% p.a.
Diesel peaks in 7yrs then curtails over 30yrs
Petrol peaks in 3yrs then curtails over 25yrs
Smaller grid, Lower opex (Good); Without refinery capability, $CHI need less power. This has played out as follows:
$CHI has got a partnership around its Maranga Ra solar PV project which is expected to deliver the following metrics~27MW, 35GWh, $36-$39mn cost)
$CHI can reduce its electricity charges by $3mn pa in the next
Decent tax asset (Good); CHI's pool of tax losses increased to $507mn: This translates to ~$142mn of credits to offset against future taxes
Unlike some other assets, freehold (Good): Whilst there is 30yrs of Useful Life left in the port, the fact that $CHI owns the freehold there is capacity to expand UL (instead of leashold assets)
Potential sell-down from Big Oil (Bad - Short Term); Given its shift away from refining, it is not inconceivable that Exxon, Ampol or BP (who collectively own c.35%) may sell-down their interest. $CHI discloses the income from these parties (likely lower in 2023) which is still meaningful - but I do see a plausible sell down from majors
More storage, but no contracts (Bad - Needs fixing): To date, there has not been any huge contracted fuel storage deals. This being said, you can expect the following:
NZ Crown will probably take c.50-60M L
Decent analysis for demand was undertaken prior to conversion (hopium)
Bizarre CEO change (Bad - More digging req'd): They recently removed Naomi James and replaced with Rob Buchanan (previously from Manawa Energy). Whilst there is no issue with this in isolation (Naomi had been there for 3-years) it is not ideal the manager who put in place some transformational changes was booted/left before they are complete
Scrap value offset Remediation Costs (Neutral): Remediation costs will probably be c.$50m and scrap refinery equipment might be worth $33m. So there is a bit of leakage but both probably expected by most mkt players.
Cost overruns are less likely (Neutral): At the moment, most of the contracted spend (c. $140m spent to date) is within budget, albeit there is still a component outstanding of the total $200-220m
Overall valuation
Juicy FCF Multiple is irrelevant: Whilst you can quickly get excited about the 7x FCF multiple, it is important to remember that a) Some capex will shift into FY24 (i.e. FCF is closer to $60-65m on a run-rate not $75m) and b) This is a fixed life asset with nil residual value at year 30 so the depreciation is a real charge
P/NTA is not perfect metric either: At 1.1x NTA, it is not cheap compared to book value. This being said - Book Value does not capture the changing yield of the port from Jet Fuel and Storage so that's an imperfect metric
Forward yield is key: Consensus is that $CHI will pay a 13.6c dividend in FY24 on $1.45 share price (so a >9% net yield)
Based on this forward yield, $CHI asset is yielding c.9% and based on my DCF - $1.45 offers limited capital appreciation (especially given future capex requirement in FY24).
On a total return basis 9% (0% capital/9% income) it is below my hurdle of 12.2% (10yr return of S&P 500). In order to get excited about $CHI I need to see one of the following
>5% drop in share price to provide more buffer on capital return because the forward yield is too low
Higher revenues from a shift in PPI (i..e more years at 7%)
Evidence that storage revenues are going to be higher earlier (i.e. earlier storage contracts)
It meets most of the qualitative metrics (as discussed article above) & is not unnecessarily levered. So now we play the waiting game on price point. Whilst I do not think a >5% drawdown is inconceivable, even if it is a better business after binning the refinery. All this being the case - for this infra investment a drawdown is required for this business to offer attractive risk/reward
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