Given the ongoing effect of snap lockdowns and NSW-Queensland flooding during the quarter, Ampol ((ALD)) turned in a solid first quarter 2021 earnings result of $150m, beating consensus forecasts by 23%. Given the rate of volume recovery throughout the quarter, some brokers see scope for upgrades for the fuel retailer through the course of 2021, with guidance now looking too conservative.
Ampol’s total Australia volumes were down -5% for the quarter versus fourth quarter 2020, but in its quarterly update the company suggested March monthly volumes had improved; and if extrapolated would be tracking at the upper end of guidance (14 billion litres per year). As a result, Macquarie was quick to upgrade Ampol’s Australia volumes from 13.5 billion litres (bottom of guidance) to 13.8bl (above mid-point).
Equally encouraging, while the latest Australian Institute of Petroleum (AIP) data suggests that first quarter 2021 petrol and diesel margins are down 13% and 41%, margins are starting to recover with petrol margins in April tracking 8 cents per litre ahead of the (2015-19) historical average.
Fuel & Infrastructure the standout performer
While Ampol reported higher earnings across its three major segments, the clear standout was Ampol’s Australian Fuel and Infrastructure (F&I) division, which excluding Lytton reported earnings of $85m ($71m first half 2020), with Australian earnings $59m ($47m first half 2020) and international earnings of $26m ($24m first half 2020).
While jet volumes were a headwind (down -53% on first half 20 and -16% on fourth quarter 2020), the company benefited from an $18m currency gain.
Overall, Ampol managed to optimise costs to lift Australia F&I earnings margins to 1.8cpl (from 1.2cpl in 1Q20), which has offset a 14% year on year fall in Australian fuel volumes.
Convenience retail
Despite lower foot traffic and with convenience retail fuel volumes down -7% year on year, non-fuel Convenience Retail continued to show positive momentum during the first quarter, with shop sales up 10% year on year. But due to lower fuel volumes and margins, first quarter 2021 convenience earnings of $78m were down -24% year on year, while retail gasoline and diesel margins were down year on year by -13% and -41%, respectively.
Historic Cost Profit (HCOP) of $175m was well up on the $29m loss in 1H20, with an inventory gain of $93m ($109m loss 1H20) proving to be a positive.
UBS expects Ampol to benefit from improving fuel volumes as travel restrictions ease, with further upside from successful execution of the company’s convenience retail strategy. While wholesale weakness in gasoline (-21% versus the previous period) tends to indicate rival EG Group has been losing market share, Macquarie notes that in the shop, sales growth of around 10% (life for like) and cost/wastage control is supporting retail momentum.
The broker maintains its Outperform rating on Ampol and after upgrading 2021 earnings per share by 2%, has increased the target price 2% to $32.25 on the improved outlook.
Due to underlying cost pressures (notably compliance, labour, and rent), Ord Minnett also remains upbeat on longer-term retail fuel margin trends. Despite retail fuel volumes being down -7%, the broker notes that they outperformed other wholesale retail customers (gasoline -21% and diesel -8%). While Ord Minnett cited site quality as arguably a key support, the broker also noted that Ampol rebranding could also be a contributing positive factor going forward.
Self-help initiatives
Due to higher Fuels & Infrastructure (ex Lytton) earnings plus the support of a low quality, one-off currency gain, the broker has increase its earnings forecasts by 11% in calendar year 2021 and 1.2% in calendar year 2022. Ord Minnett maintains a Hold rating on Ampol, with the target price increasing to $27.00 from $25.73.
Having made significant progress on self-help initiatives, especially in property divestments, capital management ($300m off-market buyback, $500m subordinated notes issue and Convenience Retail roll-out), lower waste and optimised labour, the broker believes Ampol is well positioned to leverage a boost to external demand.
While continued growth in convenience is a focus for investors, in Goldman Sachs’ view the first quarter 2021 result likely benefited from consumer preference for local convenience stores (versus larger retail formats) during covid lockdowns. In this context, the broker believes the Convenience strategy needs further de-risking.
Goldman believes the weaker first quarter result implies second quarter 2021 replacement cost operating profit (RCOP) earnings will need to recover to second quarter 2019 levels, to meet consensus first half and 2021 consensus earnings expectations.
In light of this, plus a potential risk to the outlook for the business from court proceedings between Ampol & EG Group and Ampol & Chevron, plus uncertainty over Lytton’s future, the broker maintains a Sell rating, with a target price $23.40.
Lytton refinery
While there is no comment from Ampol yet on the future of Lytton refinery, UBS expects an update on management’s review of Lytton within the next ten weeks. After breaking even in first quarter 2021, with realised refining margins ahead of UBS’ forecast, the broker’s expects the Lytton Refinery to remain operational as refining margins in the region improve.
Fuelling that outlook, management gave calendar year 2021 guidance of 6 billion litres of Lytton production.
However, not all brokers agree, with Macquarie maintaining Lytton still looks incentivised to close, with Ampol needing to work to replace Lytton’s earnings of $60-80m/year on mid-cycle margins. In addition to further lockdowns, Macquarie believes a decision on refining at Lytton as the other key risk going forward.
Meantime, Goldman Sachs continue to see the closure of the Lytton refinery as likely, with Ampol needing to either invest in or rent additional capacity without the benefit of buy/sell/swap agreements or shared access arrangements following the closure.
However, UBS notes that Ampol has still yet to commit to receive the Federal Government’s Interim Production Payment.
While UBS maintains a Buy rating and target price $30.90, the broker believes closure of Lytton would reduce the broker’s valuation to $27.20/sh, all other things being equal. To reflect better-than-expected performance from Lytton and strong realised margins in Australia, UBS has lifted FY21forecast earnings by 8%.
Fuel volumes won’t hit pre-covid levels until 2024
But given that the broker does not expect Australia’s fuel volumes to recover to pre-covid levels until 2024, UBS’s earnings outlook beyond 2021 remain largely unchanged, with fuel volumes expected to recover gradually.
The broker expects Ampol to achieve its $85m non-fuel convenience earnings uplift by FY24, with the rollout of more sites (20 new stores are anticipated in 2021) and continued focus on reducing wastage and labour costs.
Meantime, Ord Minnett expects a conversion of Lytton to an import terminal, with it broadly cash flow neutral. The broker expects near-term costs to be offset by import terminal income and an uplift in the Ampol earnings multiple.
The capital framework is forecast to be increased materially as without the refinery, Ord Minnett believes earnings volatility should reduce significantly. Ord Minnett also believes a conversion would also assist Ampol reduce its scope 1 and 2 emissions significantly.
This could, Ord Minnett adds, be part of Ampol’s broader energy transition statement, which the broker believes should also focus on alternative energy (eg hydrogen) and fast-charging for electrical vehicles.
Credit Suisse does not see much scope for sustained improvement in break-even margins at Lytton given significant over-capacity in the Asia region. Credit Suisse does not think Ampol could sustain the $87mn earnings that the broker currently assumes for Lytton in FY23 on an import model.
The broker maintains a Neutral rating on Ampol with the target price reducing to $27.50 from $27.54.
Rebranding
As at end of the first quarter, 109 sites have been rebranded to Ampol. An additional five Metro C-stores are expected to be delivered in second Quarter, while a further 15 are planned for the second half of 2021, taking the Metro count to 25-30 sites. Overall Ampol is targeting 100 stores per month from March.
While an acceleration in Ampol’s site rebranding activity is set through the second half of 2021, Macquarie notes that this is the period in which the company’s market share and pricing need to be watched most closely.
In Goldman Sachs’ view an increased roll-out on re-seller network and EG stores is needed, to de-risk concerns that not all of the network owners are prepared to re-brand to Ampol from Caltex.
