Viva Energy Group: Shows off solid discipline
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 25 August 2021, 10:00 AM
- Sectors Covered:
- Mining, Energy
- A strong 1H21 result largely in line with our expectations.
- Underlying EBITDA (RC) of A$256m +49% yoy, and NPAT A$112m.
- Showing it thinks about investors, VEA 1) gave more segment detail, 2) applied AASB16 to get EBITDA closer to cash flow, and 3) altered its dividend policy.
- Good recovery across all segments, with a surprise outperformance from Commercial (driven by bulk and specialty products with aviation/marine still weak).
- We maintain our ADD rating with a (login to view).
Solid 1H21 result
VEA posted 1H21 underlying EBITDA (RC) of A$403m (vs MorgansF A$400m), although after applying reporting format changes this has been restated to A$256m (vs MorgansF A$261m), +49% yoy.
Gross profit of A$789m (vs MorgansF A$787m) +17% yoy was also in line with expectations. The beat came with underlying NPAT (RC) of A$112m (vs MorgansF A$91m), driven by a A$25m non-cash revaluation of FX/oil derivates. The interim dividend accordingly was ahead at 4.1 cents (vs MorgansF 3.7cps).
A highlight in the result, VEA surprised with capital management, proposing a A$100m capital return and A$40m on-market buyback with the capital return to go to a shareholder vote. We appreciate the efficiency with which VEA is deploying capital, recognising that acquiring its own discounted shares would add more value than any acquisition.
Although new growth does also remain on the agenda supported by large balance sheet capacity. VEA has shown an interest in adding new growth to support its position in the broader energy transition.
Greater transparency, but reporting season headache
It took some work to incorporate all of the changes VEA has made to its reporting style, but the upshot of the changes is greater transparency and predictability going forward. VEA has:
1) divided a large portion of supply chain, corporate and overhead costs (SCO) amongst the relevant segments,
2) applied AASB 16 changes to earnings (incorporating its significant lease expenses/liabilities),
3) shifted Liberty Wholesale from Retail to Commercial segment, and
4) implemented a new dividend policy.
On the new dividend policy, VEA will now pay out 50-70% of Retail, Fuels & Marketing (RFM) underlying NPAT (RC) at each half, while also paying out 50-70% of Refining NPAT (RC) in the second half each year. This effectively partly decouples VEA’s dividend from being significantly driven by volatile refining earnings (/losses), and should smooth returns for investors.
Forecast and valuation update
We have made sweeping changes to our model and forecasts to incorporate the changes highlighted above to VEA’s reporting. Net of these adjustments our forecasts move to a post AASB 16 basis, while large portions of SCO have also now been incorporated into individual segments.
This gives the impression of sharply lower earnings expectations, although none of our valuation metrics shifted from the changes to our model structure. We also made some smaller adjustments to operating and financial assumptions post the 1H21 result. These changes have led to our target price increasing to (login to view).
We maintain an ADD rating with a blended (login to view) target price. VEA offers solid COVID recovery leverage with a safe defendable floor. This floor was strengthened by the Federal Government’s long-term support scheme for its refining operations.
We are interested to see how VEA will leverage itself to the energy transition, although are less excited by achieving this purely through offsets.
Fuel volumes and retail margin performance. November investor day. Acquisitions.
Impact from extending lockdowns. Regional weakness in fuel demand.
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