Going to ‘Plan B’

Woolworths and Caltex Australia have extended and expanded their long-term partnership in the retailer’s petrol business, following the abandonment of a previous sale of the operations to UK giant BP on competition grounds.

 

We summarise below the details of the proposed transaction:

 

  • Fuel – Caltex and Woolworths have entered into a 15-year fuel supply agreement, continuing the existing supply agreement which commenced in 2014 – albeit for Caltex at a cost of $80m per annum rather than the existing supply agreement, versus current earnings before interest and tax (EBIT) of $150m, and a $50m one-off payment to Woolworths. Caltex will extend the 104 sites within its network that accept Woolworths’ shopper dockets to 229 sites on the same terms.

     

  • Loyalty and supply – Caltex will become a fuel and convenience partner within Woolworths Rewards, with customers able to earn points at more than 700 Caltex sites. Woolworths will also start a new long-term wholesale food supply agreement at more than 700 Caltex sites.

     

  • Convenience – Caltex and Woolworths will co-create and roll out a convenience offering under the Metro banner. Fifty sites are planned in the next two years, with up to 250 over the next six years. Caltex will operate the sites and it will incorporate elements of the Woolworths Metro convenience offering.

     

  • Woolworths petrol – Woolworths is continuing to explore an initial public offering or sale of its petrol business.

 

Ord Minnett sees the deal providing benefits for both companies, as follows:

 

  • Woolworths’ petrol EBIT will increase with the company securing what it described as a “market-competitive cost of fuel” via the 15-year supply agreement, while the Metro store rollout can be expanded.

     

  • Meanwhile, for Caltex, the long-term deal reduces the risk in its convenience store rollout and means it has secured a long-term fuel supply contract, even if Woolworths successfully sells out of the petrol business.

         

    Post the deal, we have increased our Woolworths EPS estimates by 5% for fiscal 2019 and 3% for fiscal 2020, while we have cut our Caltex EPS estimates by 7% for CY18 and CY19, noting their respective June and December balance dates. We maintain our recommendations of Accumulate on Woolworths and Buy on Caltex.


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