Caltex reported a first-half CY17 net profit of $307 million on a replacement cost of sales operating profit (RCOP*) basis, at the upper end of its $290–310 million guidance range and ahead of Ord Minnett’s $294.6 million forecast, led by the Supply & Marketing division. A fully franked interim dividend of 60 cents per share was declared, below our 62.0 cents forecast.
Earnings growth was driven by an improvement in the Supply & Marketing division, due to strong underlying transport fuels margin performance, and Refining, due to increased refiner margins. Following the result, we have increased our RCOP earnings estimates by 3.2% for FY17 and 1.3% for FY18.
The earnings impact from the loss of the Woolworths (WOW, Accumulate) Petrol volumes was quantified at $150 million, but that assumes all volumes were lost – we estimate $124 million as Lytton volumes have been retained. The earnings impact is forecast to be offset by cost savings –with an initial target of $60 million and more to come as part of the operating model review and cost-savings program, the Gull NZ and Milemaker acquisitions, and lower net interest costs.
We maintain our Accumulate recommendation and $35.00 target price. We reiterate our investment thesis: 1) rising Caltex refiner margins to drive earnings growth and cash generation; 2) the transport fuels margin to remain elevated, with product mix a key driver; 3) cost efficiencies to be targeted as part of a broader review of the company’s operating model; 4) convenience opportunity – the new Foodary petrol station format is performing well and is expected to be successful, although execution risks remain.
* Caltex reports results for statutory purposes on a historical-cost basis but also reports on a replacement-cost-of-sales operating-profit (RCOP) basis – which removes the impact of fluctuations in the US$ price of crude oil and foreign exchange on cost of sales – so as to give a more accurate picture of underlying performance