- WOW has announced the sale of its petrol business to EG Group for A$1.725bn.
- We estimate the deal represents an FY19F EV/EBIT multiple of ~8.5x, which is a fair price in our view relative to listed peers Viva Energy (8.7x) and Caltex (8.9x).
- We make no changes to earnings forecasts and maintain our Hold rating on a higher target price (Morgans clients can log in to view). We see the deal as positive for WOW after a two-year long sale process.
WOW sells Petrol business to EG Group for A$1.725bn
WOW has announced the sale of its petrol business to EG Group for A$1.725bn. EG Group is a British retailer that operates petrol stations in Europe and the US. The sale price is not too far off the A$1.785bn that BP had agreed to pay for the business before the ACCC announced its intention to block the transaction earlier this year.
The deal is subject to FIRB approval and completion is expected in early 2019. We do not anticipate any competition issues with the transaction given EG Group does not currently operate in Australia. WOW said following completion of the transaction it will consider a range of options for the use of the proceeds, including capital management initiatives.
The price looks reasonable
We estimate the deal represents an FY19F EV/EBIT multiple of ~8.5x. Given Viva Energy (VEA) is currently trading on 8.7x and Caltex (CTX) is on 8.9x we think WOW got a fair price as well as transaction certainty compared to if it had decided to IPO the business in the current market.
The price is also close to what BP had agreed to pay so overall we believe it was a good outcome that gives WOW significant balance sheet flexibility with the prospect of further capital management on the horizon.
Exposure to the convenience sector maintained
As part of the deal, WOW and EG Group have entered into a 15-year commercial agreement covering fuel discount redemption, loyalty and wholesale product supply. Key features of the alliance include the continuation across the network of WOW's 4cpl fuel discount, the ability for customers to earn Woolworths Rewards points on fuel and merchandise purchases, and the wholesale supply of food by WOW to the network.
The agreement is similar to the one WOW struck with CTX and maintains its exposure to the faster-growing convenience market.
Maintain Hold rating
While we make no changes to earnings forecasts given the transaction is still subject to FIRB approval, our PE-based target price increases (Morgans clients only) as we see the deal as positive for WOW and ends a two-year long sale process. However, with a forecast 12-month TSR of 2% we maintain our Hold rating.
Upside risks to our valuation include stronger-than-expected growth in Australian Food sales, larger-than-expected increase in group EBIT margins and smaller-than-expected losses sustained by Big W. Downside risks include increased pricing intensity, more competitors entering the supermarket sector and a slowdown in sales momentum.
Morgans clients can login to view our detailed report and revised share price target for Woolworths (WOW). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
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