Full Tank

Caltex has guided to an unaudited first-half CY18 net profit in the range of $295–315m, on a replacement cost operating profit (RCOP*) basis. According to the previous business segmentation, guidance for both the supply and marketing, and refining divisions was better than expected (Caltex has re-segmented its accounts for these divisions into ‘convenience retail’ and ‘fuels and infrastructure’ from first-half 2018 to better reflect core business functions). We note the following key points:


  • RCOP earnings before interest and tax (EBIT) guidance was for $442–472m, assisted by changes to the classification of ‘externalities’, such as currency.


  • Net debt was guided to increase to $950m in first-half CY18 from $814m in CY17 due to the $115m Seaoil acquisition, which was completed in March.


  • Interest expense is forecast to be $29m, down 18% on a year ago due to debt facility refinancing.


  • Underlying supply and marketing EBIT guidance increased by 9% at the midpoint – excluding acquisitions and externalities, driven by higher transport fuel margins, cost savings from the Quantum Leap program and the contribution from acquisitions, such as Gull NZ.


  • Refining EBIT guidance fell 26% due to a lower Caltex refiner margin, but cost savings were better than expected.


Caltex has made positive changes to its portfolio with the asset optimisation review progressing and a measured sale of its retail sites about to commence. However, disruption associated with the transition of the retail operating model from franchise to corporate could create a headwind, and questions remain regarding execution of the roll-out of its Foodary convenience concept. The loss of Woolworths (WOW, Accumulate) volumes is possible, although the EBIT impact – estimated at $150m – and risks are well known.


Our EPS forecasts have increased by 11.4% for CY18 and 7.4% for CY19. We have upgraded our recommendation to Buy from Hold and raised our target price to $35.00 from $34.00 due to 1) valuation support at recent share price levels, 2) our earnings revisions, 3) confidence in refiner and transport fuels margins, and 4) positive changes emerging with respect to the asset portfolio.


* Caltex 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.

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