Viva Energy Group: Performing despite tougher environment

About the author:

Author name:

By Adrian Prendergast

Job title:

Senior Analyst

Date posted:

22 February 2022, 9:30 AM

Sectors Covered:

Mining, Energy

• Viva Energy Group (ASX:VEA) delivered an overall in line FY21 result, with underlying NPAT 6% above consensus and EBITDA 4% below.
• Final dividend of 3.2cps (fully franked) for a payout ratio of 60% (policy 50-70%).
• Healthy earnings and balance sheet have VEA on the hunt for acquisitions.
• FY22 capex guidance of $330-$350m outlines a large step up in expenditure on VEA’s Energy Hub Projects ($100-$110m).
• A healthy result, but following recent share price strength we revise our recommendation to Hold (from Add) with an upgraded (login to view) target price.

In line FY21 result

A healthy 2H21 result from VEA, which overall was in line with consensus. Underlying NPAT of A$192m was 6% above consensus, with underlying EBITDA of A$484m coming in 4% below. 

Refining was the highlight, with gross refining margins (GRM) rebounding strongly in 2H21 to average US$7.1/bbl. With regional refining margins continuing to surge early in 2022, VEA expects another solid year from refining. 2022 should also see solid intake volume and refinery availability, with no turnaround activity scheduled.

Commercial also performed well with EBITDA growth of 9% pcp. Higher margin specialty and bulk products have performed consistently well during the pandemic, also helped by marine (ex-cruise), while aviation and cruise still remain impacted. 

Retail meanwhile struggled in 2H21, post second half EBITDA of A$80m, which was -26% vs 1H21. The majority of the pullback in retail earnings can be attributed to a Q4 surge in oil prices, other cost headwinds and effected 2H retail volumes.

FY22 capex guidance of $330-$350m was well above previous consensus, with spend on the energy transition ratcheting up. VEA plans to spend $100-$110m capex in FY22 on Energy Hub Projects. The main focus being on an LNG import terminal and hydrogen refueling station at Geelong sometime in 2022. We expect progress towards FID will also bring with it a clearer development path.

Analysis

We expect retail margins to remain under pressure in 2022. While rising oil prices have a temporary impact on costs, we expect broader cost headwinds from labour/inflation/competition to remain strong.

VEA also spoke about the lingering demand impact around metro centres from a rising percentage of customers electing to work from home through the Omicron peak.

VEA has flagged that it is interested in pursuing opportunistic M&A in 2022 if it can secure an attractive deal (either lower multiple or value accretive). VEA made it clear that it would not allow its balance sheet to significantly weaken in its pursuit of new growth.

We expect such an acquisition would likely be a bolt-on for its traditional fuel business. In the absence of (or even in addition to) acquisitions we expect VEA to consider further capital management later in 2022.

Forecast and valuation update

Post the FY21 result we have lifted COGS and oil prices, while also applying a mark-to-market on opex impacting retail, commercial and refining earnings. We have lifted FY22 capex in line with guidance. And rolled our model forward.

Post the changes our blended valuation (DCF:EBITDA) has increased to (login to view).

Investment view

A resilient business with further earnings growth from refining and commercial in 2022, but following its recent share price performance VEA is now trading on FY23F PE multiple of 19x and EBITDA of 9.2x.

As a result we revise our rating to Hold (from Add) with an upgraded (login to view) target price.

Price catalysts

Retail/commercial fuel volumes. Energy hub FID. Acquisitions.

Risks

COVID related risks to fuel demand domestically and regionally.

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