Brokers Increasingly Confident In Caltex
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The key question for brokers regarding Caltex ((CTX)) is how defensive the stock remains, given the headwinds to volumes from a future with more fuel-efficient cars and electric vehicles.
The company has guided to first half RCOP (replacement cost of sales operating profit) of $295-315m while net debt is expected to increase to $950m because of the Seaoil acquisition.
On an underlying basis supply & marketing was broadly in line with UBS estimates. The broker estimates the market is now valuing this segment at a -25% discount to the ASX 200 industrials ex financials, despite only modestly lower growth.
Guidance is ahead of Ord Minnett's forecasts as refining fell less than expected, while Toyota Fleet Management and Ampol Singapore are boosting underlying supply & marketing earnings.
The broker upgrades to Buy from Hold because of valuation support, upgraded earnings revisions, confidence in refiner margins and the positive changes emerging with respect to the asset portfolio. Estimates for earnings per share (EPS) are lifted by 11.4% for 2018 and 7.4% for 2019.
Ord Minnett is confident that refiner margins will increase in coming months, noting industry competition in transport fuel remains rational. The asset optimisation review is slowly starting to sell retail sites, although neither a retail nor infrastructure sale is expected to be material.
The concerns the broker has centre on the transition in the retail operating model to corporate from franchising, which could create headwinds, while there are uncertainties regarding execution on the convenience roll-out, Foodary.
A loss of Woolworths volumes is possible but the earnings impact and risks are well known, in the broker's opinion. Macquarie agrees with Ord Minnett that meaningful infrastructure divestments following the asset review are unlikely while that the convenience store roll-out has some risks.
Macquarie upgrades, to Outperform from Neutral. The broker argues that supply & marketing has a defensive earnings stream that has consistently grown volumes and earnings.
Market expectations are envisaged sufficiently negative such that the risk/reward is increasingly skewed positively. The broker calculates that the business has de-rated to the extent that it provides compelling valuation on a sum-of-the-parts basis.
Morgan Stanley is less positive, with a view that earnings in marketing & supply will come under pressure. That said, a higher multiple is warranted, versus the stock's long-run PE average of 12x, given a larger footprint and more defensive business.
The establishment of a trading business in Singapore could also support the stock at a premium to the long-run average. Nevertheless, given a reduced earnings forecast for marketing Morgan Stanley maintains an Underweight rating.
Macquarie suggests, even with the future entailing more fuel-efficient cars and electric vehicles, earnings growth can be maintained throughout the medium term. Volumes are expected to moderate because of increasing vehicle fuel efficiency, while the impact from electric and autonomous vehicles is likely to be longer dated.
Australia lags many other countries in terms of electric vehicle adoption, with the broker noting only 1000 such vehicles were sold in Australia in 2017.
Macquarie calculates the expected compound growth rate from each of the Caltex product lines and applies it to the transport fuel mix, which suggests 0.7% volume growth per annum.
Furthermore, the shift in mix to higher-margin premium fuels, with premium petrol and diesel now 33% and 38% of the total, respectively, indicates further margin support for Caltex as consumers replace older vehicles with new ones.
On the protracted issue of the Woolworths ((WOW)) fuel supply volumes Macquarie expects a transaction will likely be completed in some form and, whatever the case, it will be an earnings headwind for Caltex.
The most likely scenario is that BP makes a substantial divestment of assets to a third party, IPO, or a trade sale to a new acquirer with little or no Australian footprint.
Mitigation activities on Caltex' behalf could include terminalling services or supplying part of the volume in certain regions, bolt-on or individual service station acquisitions and cost reductions. Estimates assume a loss of volumes starts in 2019.
While the loss of the Woolworths fuel supply agreement creates risk, UBS suggests that further cost reductions, the uplift from the convenience strategy and recent acquisitions offset this.
The broker calculates Caltex is now trading on around 13x 2018 estimates of EPS, which offers around 6% 3-year compound growth, along with a 4% dividend yield.
FNArena's database shows five Buy ratings, one Hold (Deutsche Bank, yet to update on guidance) and one Sell (Morgan Stanley). The consensus target is $36.49, suggesting 19.2% upside to the last share price. Targets range from $26 (Morgan Stanley) to $40.80 (Credit Suisse, yet to update on guidance).
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