Viva Energy Group announced unaudited CY19 RC* net profit guidance of $135–165m (versus $229m in CY18), in line with our $141m estimate, with group RC operating earnings (EBITDA) guidance of $625–655m ($770m CY18). CY19 volumes are estimated at 14.6–14.7bn litres (14.0bn litres CY18).
CY19 EBITDA guidance was below our estimate across the retail ($548–558m; OMLf $566m), commercial ($292–297m; OMLf $308m) and refining ($120–130m; OMLf $132m) businesses, with only supply, corporate and overheads cost guidance ($330–335m; OMLf $336m) ahead of our estimate.
Competition in retail and commercial, along with high operating costs (such as freight), have weighed on CY19 earnings, although volumes are better than expected. We note volumes at the Express business of Coles (COL, Lighten) have stabilised at 65m litres per week for 2H19, a sound 9% increase on 1H19.
Retail fuel margins have improved, although challenges remain including:
- lower prices from the previously higher-priced Coles Express sites;
- site growth well ahead of population, fuel demand and store sales; and
- a stronger independent sector.
These factors all suggest the path to retail fuel margin expansion will be bumpy.
We have reduced our EPS forecasts by 0.4% in CY19, 2.0% in CY20 and 5.0% in CY21, due to the lower-than-expected CY19 guidance and our more conservative retail fuel margin estimates, leading us to lower our target price to $2.15 from $2.40. We maintain our Accumulate recommendation, however, based on valuation and an expected recovery in refining and retail fuel margins.
* Viva Energy Group reports its results for statutory purposes on a historical cost basis, but also reports on a replacement cost of sales operating profit (RCOP) basis – which removes the impact of fluctuations in the US$ price of crude oil and foreign exchange on the cost of sales – to give a more accurate picture of underlying performance.