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Caltex Softens Outlook, All Eyes On BP

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Brokers were slightly disappointed with 2017 profit guidance from Caltex ((CTX)), as it appeared soft in the context of a half-year contribution from the Milemaker acquisition and four months from the Gull acquisition.

The company expects net profit (RCOP basis) of $600-620m. The mid point of this guidance is -8% below Deutsche Bank's prior estimates. However, the broker points out supply & marketing, which drove the miss to most estimates, includes an impact from FX and timing lags.

Headwinds are likely to persist into 2018, emanating from lower retail margins experienced in the second half, which were driven by increased retail competition. Deutsche Bank expects this level of competition to be maintained, if not intensify, in 2018 and weigh on margins.

There is also a lower mix of premium petrol. While total premium fuel volumes have increased, this was lower-margin premium diesel rather than petrol. Non-fuel income is also expected to be lower because of the impact on operations from franchise conversions.

The company has highlighted that diesel product is trending stronger against petrol amid softening non-fuel income, but provided no guidance into the new year. Citi ascribes the soft guidance to ongoing costs from the franchise review and Foodary, plus modest margin pressure compared with a strong first half. Morgan Stanley expects a softening of margins over time as the consumption of fuels changes in Australia. This is likely to lead to greater competition.

Marketing may have been a bit weak but Credit Suisse finds the fact margins were a little softer and premium volumes slightly lower not much for the bears to get excited about. On a global basis, the broker adds, this is even less exciting, given gasoline demand peaked in most OECD countries more than a decade ago.

Credit Suisse believes discounting from Coles ((WES)) led to some of the margin weakness in the September quarter, a trend that is likely to have reversed in the December quarter. While this isn't a business with a lot of organic growth, the broker asserts it is solid, generating cash, under-geared as well as highly defensive.

Caltex is in transition, in Ord Minnett's view, with several strands to its efforts to drive shareholder returns. The core business is attractive and the broker expects refiner margins can support earnings growth and generate cash, with potential to deploy this into higher-multiple opportunities.

Transport fuel margins, while likely to be down in the second half of 2017 versus the first half, should be supported by the product mix and competitive dynamics. Meanwhile, acquisitions and cost savings should drive supply & marketing earnings growth.

UBS agrees Caltex has a number of levers to drive growth in marketing & supply including supply-chain optimisation, fuel premiumisation and convenience store roll-out. The broker believes acquisitive growth remains a priority, although the balance sheet suggests there is limited capacity to undertake material acquisitions or buybacks in the near term.

ACCC Decision

Despite the ACCC decision to oppose the sale of Woolworths ((WOW)) petrol outlets to BP, Deutsche Bank continues to factor in a six-month delay to the transaction, pending a probable response from BP and Woolworths.

Citi is already modelling cost improvements and acquisitions offsetting the lost business from Woolworths but awaits developments, suspecting there could be more upside for Caltex from the BP/Woolworths transaction. Further updates are expected at the February results.

UBS retains its Buy thesis based on Caltex retaining the fuel supply deal with Woolworths, and awaits a response from BP as to whether it will challenge the decision. The broker believes the muted reaction in the Caltex share price to the news is an indication the market envisages considerable risk that BP will not only challenge decision, but also win.

If BP does challenge, Caltex shareholders would need to await the outcome of the case before knowing the final impact. If BP does not challenge then it would be up to Woolworths to determine the next course of action.

Ord Minnett cuts forecasts for earnings per share by -4.9% for 2017 and -6.6% for 2018, although raises forecasts for 2019 by 6.2% to incorporate the retention of the Woolworths petrol volumes.

Credit Suisse considers the blocking of BP's acquisition of Woolworths a major positive for Caltex and considers it highly unlikely that Caltex will lose the Woolworths volumes in 2018, so these are added back into the numbers.

Credit Suisse excludes the Woolworths earnings from 2019 onwards until there is more clarity on BP's plans. All up, Credit Suisse tentatively raises 2018 estimates by 11% and reduces 2019 by -5%. The broker suggests, if Woolworths volumes are sustainably retained, the economics of infrastructure divestments are even stronger.


Caltex reports results on a replacement cost of sales operating profit (RCOP) basis which removes the impact of fluctuations in the US dollar price of crude oil and foreign exchange on cost of sales to give a more accurate picture of underlying performance.

FNArena's database shows four Buy ratings, two Hold and one Sell (Morgan Stanley). The consensus target is $35.99, signalling 4.6% upside to the last share price. Targets range from $27.00 (Morgan Stanley) to $40.80 (Credit Suisse).

This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.

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