Fuel and Food

Caltex Australia held investor briefings last week, with presentations on its fuels and infrastructure (Day 1) and convenience retail (Day 2) divisions. The company also released its September-quarter refining margin data – the realised refining margin for the September quarter came in at US$11.53/bbl, up on the June-quarter's US$9.99/bbl margin but down on the US$15.23 booked in the September quarter of CY17.


A capital allocation framework was outlined, with the dividend payout ratio guidance range raised to 50–70% from 40–60% of earnings.


We summarise the key messages from the investor briefings as follows:


  • Day 1 – For the fuels and infrastructure division, Caltex noted lower retail fuel margins and volumes, and a lower earnings before interest and tax (EBIT) contribution from the Lytton refinery due to an outage in October. The business enjoys strong competitive advantages, such as an integrated supply chain, efficient operation, B2B volumes that are defensive, and access to growth options in New Zealand and the Philippines.
  • Day 2 – For the convenience retail division, the company reiterated FY18 guidance for a $120–150m increase in EBIT. It also provided the key building blocks of its strategy, including double industry sales growth and labour savings, while the importance of the partnership with Woolworths (WOW, Hold) and quick-service restaurant offerings was also highlighted.

Caltex is undergoing significant change and is now starting to land some strategic initiatives. The long-term Woolworths deal – covering fuel supply, Metro roll-out, Woolworths Rewards, alliance sites and food sourcing – reduces the risk around fuel volumes and the convenience retail strategy, which had weighed on the share price and earnings multiple.


The company’s transition from a franchise to corporate operating model is a challenge, but the cost has been well flagged and is an enabler of the new convenience strategy. The core business is robust, yet falling volumes and margins are a near-term headwind, although we remain confident the industry structure will support rational competition. Refiner margins should remain robust, if not a little volatile, and growth options remain incremental, led by Ampol Singapore volumes, Gull New Zealand and Seaoil.


We maintain our Buy recommendation and target price of $33.50.

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