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Morningstar | No-Moat Caltex Completes Off-Market Buyback in Time to Enjoy Recovering Refiner Margins.

We retain our AUD 33.50 fair value estimate for no-moat Caltex. The company completed its AUD 260 million off-market buyback, the AUD 23.43 price reflecting a 14.0% discount, in line with expectations. Demand was strong, requiring an 86.86% scale back. Shares on issue declined by 11.1 million or 4.3% to 249.7 million. We applaud buybacks when not only is the effective price at a material discount to the market price, but more importantly, the price is at a material discount to fair value. The AUD 23.43 buyback price is at a healthy 30% discount to fair value. The question remains: Why only AUD 260 million when market appetite was clearly far greater, the franking ledger and balance sheet were accommodative, and the market price favourably placed?

The answer seems to be the company exercising caution at a time when refiner margins have been under assault. But even here, the argument loses its teeth. The March 2019 Caltex Refiner Margin, or CRM, of USD 8.67 per barrel improved 18% on February’s USD 7.34, itself up 11% on January’s USD 6.60; and March was impacted by a Lytton refinery shut-down to rectify power interruptions experienced in January. Without the shut-down, the CRM in March would have been an even higher USD 10.67 per barrel. This is fast approaching our unchanged midcycle USD 13.00 per barrel CRM assumption in 2023 dollars, and opens the door to further capital management in future, already recognising a recently increased dividend payout ratio of 50-70% versus the 40-60% historical.

Caltex shares have strengthened marginally from March AUD 25.65 lows but at AUD 27.45, remain undervalued. Sustainable recovery in refiner margins and demonstrable growth from the fuels and infrastructure segment to offset lower contract repricing from Woolworths’ fuel supply are potential catalysts for continued share price rerate. Our fair value estimate equates to a little changed 2023 EV/EBITDA of 7.3, P/E of 13.8, and dividend yield of 3.6%, all discounted at WACC.

In nominal terms, the P/E and yield would be 9.2 and 5.4%, respectively. We assume five-year group EBITDA CAGR of 5.9% to AUD 1.4 billion in 2023, the CAGR flattered by 2018’s profit dip. At the current share price, our AUD 1.29 DPS forecast for 2019 equates to a handy 4.7% fully franked yield.