Viva Energy Group: Headwinds still blowing

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
21 June 2019, 10:30 AM
Sectors Covered:
Mining, Energy

Peer Caltex delivers materially weaker guidance

Surprising the market, close refiner/retailer peer Caltex Australia (CTX, not rated) posted weaker than expected 1H'CY19F earnings guidance, indicating group NPAT was likely to be approximately half of NPAT for the prior year. The largest stepdown in earnings came from refining and convenience retail, two areas VEA is also exposed to.

We await the next trading update from VEA to verify how much of the broader headwinds outlined by CTX have impacted Viva Energy. In the meantime we have reviewed our assumptions.

Assuming higher costs for Geelong

We have increased assumed energy costs for CY19F by 10% to US$1.50/bbl for the Geelong refinery, reflecting volatility in crude oil prices, which is likely to impact VEA's cost of procuring its oil/fuel resources. We have also increased ex-energy operating expenses at Geelong on a materially lower Australian dollar, which we expect is adding to the higher costs. This has seen our refining operating EBITDA (replacement cost) estimate for CY19F decline to A$112m (from A$135m), despite Geelong's gross refining margin (GRM) showing signs of recovery in recent months.

Retail competition heating up

We also expect the increase in retail competition reported by CTX may be having an impact on VEA's business, with VEA's plans to lower fuel prices across the Coles Alliance sites expected to deliver some volume recovery, but perhaps at the expense of additional operating costs as VEA's competitors respond. As a result, we have increased opex assumptions by 10% on average, which we expect to remain a factor beyond CY19F.

Investment view

The net impact of these changes is a 20% reduction to our CY19F EPS forecasts and a 14% reduction to our CY20F and CY21F estimates. This has impacted our blended (50:50 PE:DCF) valuation, which we have now revised (Morgans clients can login to view).

As a result, we have downgraded our recommendation to Hold (from Add), believing the downgrade cycle for the refiner/fuel retail sector still has some way to go. The key risk for VEA is the potential for a sharper impact to earnings from the difficult conditions.

More information

Morgans clients can login to view our detailed report and revised share price target for Viva Energy (VEA). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer(s): Morgans Corporate Limited was a Co-Lead Manager for the initial public offer of shares in Viva Energy Group Limited and may have received fees in this regard.

Analyst owns shares.

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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