1 March 2020
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector : Energy||52-Week Range: A$28.44 – 37.02|
|Industry: Oil & Gas||Market Cap: A$7,826.9m|
We rate CTX as a Buy due to the following drivers:
- Extremely high barrier to entry in the markets in which CTX operates within, limiting the amount of market players.
- Difficult to replicate infrastructure and supply chain.
- Regional product demand growth set to exceed refinery capacity over the next 5 years putting the Lytton refinery business in a great position.
- Expansion of network by way of acquisitions.
- Reduce exposure to refining.
- Retail/Convenience model revamp could deliver significant growth over the medium-to-long term.
- Potential capital management.
We see the following key risks to our investment thesis:
- Operational and incident risk at Lytton refinery.
- Continued lower Caltex Refiner Margin (CRM).
- Competitive pressures in refinery and retail.
- Adverse currency movements (AUDUSD).
- Longer term disruption from Electronic Vehicles (EV).
- Regulatory risk.
- Class actions by franchisees or employees (e.g. employee underpayments by franchisees).
Caltex Australia’s (CTX) first half FY18 (1H18) results were in line with guidance, with RCOP (replacement cost operating profit) of $296m (+1% on pcp). Total Group revenue was up +19.5% at $21.4bn, while underlying replacement cost EBIT grew +15.0% to $935m, Lytton Refinery the key delta driver ($103m incremental EBIT).
Clearly, what drove the share price post the half year results was the outcome from the asset review that management was conducting, which was exploring options to unlock value in CTX’s infrastructure assets.
Whilst it does remove one key catalyst for the share price, we believe the potential for capital management (buy-backs) isn’t completely off the table, with management now looking at partial sales (15-25% of $2bn gross value).
Further, we highlight the $3.58 per share worth of franking credits sitting on CTX’s balance sheet.
We maintain our Buy recommendation as we see value in CTX infrastructure, growth opportunities within key operations and the potential for capital management.
- 1H18 key points.
1. Replacement Cost Operating Profit (RCOP) NPAT was up +1% to $296m on pcp, which is within guidance and impacted lower CRM, lower retail fuel margin and ongoing transition from franchise sites to company operations.
2. RCOP EBIT was down -2% to $443m, owing to growth in Fuels & Infrastructure (+9%) more than offset by decline in Lytton (-30%) and Convenience Retail (-14%).
3. A fully franked interim dividend of 57.0cps was declared.
4. Gearing (net debt / net debt + equity) was at 24% or if adjusted for lease was at 37%.
- Asset review comes up with hold. CTX previously announced that it was undertaking an asset optimization review to see whether there is an opportunity to unlock shareholder value “as measured by Total Shareholder Returns”. With the listing of Viva Energy REIT and CTX subsequently providing its own property portfolio disclosure, the market (us included) have constantly debated whether it makes sense for the Company to unlock this capital. On our estimates and using peer group trading multiples, we arrive at a SoTP valuation of $44.51 per share. However, at the half year results management noted that “…Convenience Retail real estate review concluded that a passive real estate sale and leaseback transaction is not financially compelling in isolation as sales proceeds are largely offset by the assumption of the related lease liabilities…”. This definitely does remove one positive key catalyst for the stock, despite management noting they are exploring partial sale of a material part (15-25%).
- Capital management. Clearly the market was disappointed with the outcome from the asset review. However, in our view the potential for the company to conduct capital management is not completely removed. Sure, we would have preferred something substantial had the asset sale in its entirety happened. Nonetheless, partial sale will raise capital and this could lead to a “good enough” buyback.
- Don’t forget the franking @ $3.58 per share. As at Dec-17, CTX had $936.1m in franking credits available to shareholders on its balance sheet. These franking credits essentially add a further $3.58 to our SoTP valuation. Whilst franking credits don’t mean much to institutional investors, they are very attractive to retail clients. Management noted their preferred form of any additional capital return is an off-market buy-back.
Figure 1: CTX Financial Summary
Source: BTIG, Company, Bloomberg
Caltex Australia Limited (CTX) purchases, refines, distributes and markets petroleum products in Australia. The company’s products include petroleum, motor oil, lubricants, diesel fuel and jet fuel. Caltex also operates convenience stores, fast food stores and service stations throughout Australia. CTX operates one refinery (Lytton, QLD), 25 terminals, 107 depots and about 2,000 service stations and diesel/truck stops. The Caltex infrastructure network is a key competitive advantage.