Viva Energy Group provided a first-half CY20 trading update ahead of Ord Minnett’s forecasts, as retail fuel margin expansion drove higher retail operating earnings (EBITDA). This has been supported by a rational industry structure that has seen significant retail fuel margin expansion in CY20 in the face of dramatic volume declines, with the irrationality of CY19 seemingly now passed. The company guided to an RC* net profit of $20–50m, versus $50.9m in 1H19, with group RC EBITDA of $257.5–287.5m, versus $297.4m in 1H19.
Capital expenditure and cost management were better than expected. Despite already having a lean cost base, Viva Energy has been able to reduce costs further given weak demand, and management has taken a judicious approach to spending.
Capital management was postponed but has now commenced with an on-market buyback of $50m. Viva Energy is looking to redistribute much of the $680m in post-tax proceeds from the sale of its stake in Viva Energy REIT (now known as Waypoint REIT).
Refining is expected to remain weak with Geelong refiner margins below breakeven levels at US$4.50–5.00/bbl. However, the Geelong Energy Hub provides optionality for valuable industrial land and, while commercialisation is uncertain, it indicates management’s broader ambitions.
We have lifted our RCOP EBITDA forecasts by 7.8% in CY20, 0.1% in CY21 and 3.6% in CY22. We are more positive on the stock due to higher retail fuel margins, capital expenditure control and cost management, a return to capital management, and valuation support. We have upgraded our recommendation to Accumulate from Hold and raised our target price to $2.00 from $1.40.
* Viva Energy reports its results for statutory purposes on a historical cost basis, but also reports on a replacement cost of sales (RC) basis, which removes the impact of fluctuations in the US$ price of crude oil and foreign exchange on cost of sales, so as to give a more accurate picture of underlying performance.