EUR 850.00 For Business Accounts Only

Morningstar | Lower 2018 NPAT Beats our Target and No-Moat Viva Energy Is Primed for Growth. No Change to FVE.

We make no change to our AUD 3.00 fair value estimate for no-moat Viva Energy. The company reported a 24% decline in underlying 2018 replacement cost operating profit to AUD 293 million. While this was around 12% ahead of our AUD 263 million expectations, there are no implications for our longer-term outlook. Viva paid a better than anticipated AUD 4.8 cent second-half dividend, with an as-expected 60% payout but on 12% better earnings.

The retail, fuels & marketing segment reported a better than expected 2% increase in underlying EBITDA to AUD 933 million, with gains in the commercial component countering well publicised issues with Coles on the retail side. This highlights the innate strength in Viva’s integrated business model, with temporarily weaker volumes through the alliance largely offset via growth in other channels. Also positive, supply, corporate & overheads cost of AUD 528 million was creditably less than AUD 548 million prospectus forecast due to one-off savings including at the head office. But as expected, the refining segment suffered a sharp 55% decline in underlying EBITDA to AUD 125 million, due to historically low regional refiner margins, down 27% to USD 7.40 per barrel. This overshadowed the 2018 result, but we expect it to unwind as refiner margins expand.

Viva has reaffirmed first-half 2019 prospectus guidance for AUD 323 million in group underlying EBITDA, though notes this assumes a Geelong refinery margin of USD 9.70 per barrel. The margin was just USD 4.00 per barrel in January 2018, highlighting downside risk. Our more conservative first-half 2019 underlying EBITDA forecast is unchanged at AUD 292 million, assuming some recovery in refinery margin to an average USD 7.50, but not to prospectus levels. And our fiscal 2019 underlying NPAT forecast is little changed at AUD 311 million or AUD 0.16 per share, marginally bettering 2018’s AUD 0.15. This does, however, assume second-half refiner margins recover to USD 9.20.

Viva is sticking with a 50%-70% payout ratio range and we forecast an AUD 10 cent dividend in 2019, translating to a 4.2% fully franked yield at the current share price. Viva shares have strengthened nearly 40% since AUD 1.70 December lows, but at AUD 2.35, remain undervalued. Progress on restoring alliance volumes to 70 million litres per week near term, and then to over 75 million litres in the longer term as new programs mature, could be a key catalyst for share price appreciation towards fair value. By our reckoning, an AUD 2.35 share price in too-low five-year EBITDA CAGR of 9.8% to AUD 724 million.

Our Viva fair value estimate equates to an unchanged 2023 EV/EBITDA multiple of 8.3, high enough we think given risks. Our fair value equates to a 2023 P/E of 15.5 times and dividend yield of 3.0%, both discounted at WACC, or 10 times and 4.5%, respectively, at today’s fair value. We continue to view longer-term earnings potential as attractive including margin improvement assuming Viva has a far keener eye on the marketing ball than when under the Shell umbrella, in addition to the new V-Power diesel offering. Oil Super-majors like Shell don’t live or die on marketing, as do the likes of Caltex and Viva. In nominal terms, we assume the refiner margin improves to a midcycle USD 10 per barrel versus 2018’s USD 7.40, and that the marketing margin improves to AUD 6.8 cents per litre versus 2018’s AUD 5.2 cents.

Net operating cash flow in 2018 improved by 17% to AUD 285 million, though assisted by a one-off increase in payables. Net debt stood at just AUD 51 million at period end, down from AUD 288 million in June. The unstretched balance sheet is a key appeal of Viva Energy affording flexibility for future growth or capital management initiatives. We project net debt to briefly increase above AUD 260 million, capturing the AUD 137 million one-off cash payment for the Alliance reset with Coles and AUD 42 million purchase of the remaining 50% of Liberty Oil’s wholesale business, before rapid reversal to a net cash position by fiscal 2022 all else being equal.