EUR 850.00 For Business Accounts Only

Morningstar | Infrastructure Stays but Caltex Considers Monetisation of Real Estate. No Change to FVE

No-moat Caltex reported underlying first-half fiscal 2018 NPAT up 1% to AUD 296 million, 3% below our AUD 305 million expectations. Underlying EBIT fell 2% to AUD 443 million, beneath recent AUD 450-470 million guidance, and 4% below our AUD 460 million target. We make no change to our AUD 33.50 fair value estimate, or to our fiscal 2018 EPS forecast of AUD 2.44. The market appears unimpressed, the shares down nearly 7% upon release of the profit result. At around AUD 30.70, we think Caltex shares are marginally undervalued.

Caltex has recently just begun asset optimisation, transitioning its franchised network to a full company-operated retail model (to be largely completed by end 2020), and splitting fuels and infrastructure into a commercially separate business segment from the convenience retail offering. The company says separate businesses and cultures are already emerging, though not without cost. First-half fiscal 2018 convenience retail EBIT fell 14% to AUD 161 million reflecting the impact of ongoing franchise store conversion, though with rising crude and product prices also taking their toll.

But asset optimisation plans are now proposed to go a step further again, with various infrastructure ownership options having been considered, including partial sale with take-or-pay contract or a capacity charge, in addition to various models for a convenience retail property sell-down. Thankfully, infrastructure plans have sensibly been knocked on the head, with full ownership deemed optimal given strategic significance. But on the convenience retail side, plans remain afoot. Caltex says the book value of its retail network comprising freehold land, buildings, plant & equipment, and so on approximates AUD 1.5 billion and independent valuations exceed AUD 2.0 billion. Caltex could partner with a real estate player, with unlisted capital currently believed more attractive than a public REIT.

For now, Caltex envisions selling up to AUD 500 million or 15%-20% of the existing property portfolio with a view to further monetisation over time. The intention is to retain 25%-50% equity in real estate partnership for control and flexibility. Its not clear to us whether the negative share price reaction is due to the limited scope of asset monetisation, or simply due to any sell-down being considered at all. We estimate the potential value liberated might be up to AUD 1.50-2.00 per share, not counting the value of the portion retained when marked-to-market. We don't include either in our fair value estimate. Perhaps the market is saying the returns don't justify the trouble or risk, and we'd have to sympathise with that view.

Our fair value estimate equates to a 2022 EV/EBITDA of 8.3, P/E of 15, and dividend yield of 2.9%, all discounted at WACC. In nominal terms, the P/E and yield would be 10 and 4.4%, respectively. We continue to assume EBITDA growth has essentially plateaued at 1.7% CAGR, in contrast to hectic double-digit growth rates to 2015 enjoyed from Caltex's first mover advantage into premium diesel fuel.

Underlying fiscal 2018 fuels and infrastructure EBIT declined by 2% to AUD 443 million with 30% decline in Lytton refinery EBIT to AUD 105 million mostly offset by nonorganic volume growth via expanding Ampol Singapore, the Seaoil strategic partnership in the Philippines, and the Gull NZ acquisition. Lytton suffered a near-20% decline in the refiner margin to USD 10.06 per barrel, but operationally the refinery performed well.