EUR 850.00 For Business Accounts Only

Morningstar | Viva Energy Group: Another Late Earnings Downgrade on Persisting Low Refiner Margins; FVE Intact

We make no change to our AUD 3.00 fair value estimate for no-moat Viva Energy. The company has again downgraded fiscal 2018 earnings guidance due to weaker-than-expected regional refiner margins. But we hold to our longer-term view, including assumed reversion of the refiner margin to a midcycle USD 9.00 per barrel in real terms. Viva says the actual refiner margin for December was just USD 3.30 per barrel, driven lower due to gasoline cracks falling on excess regional supply. Consequently, the 2018 refiner margin has come in at just USD 7.40 per barrel, well below original USD 9.20 prospectus forecast. We reduce our underlying EBITDA estimate for the refining business for 2018 by AUD 25 million to AUD 125 million, in line with updated guidance. This results in a commensurate decrease to our group EBITDA estimate to AUD 518 million, and an approximately 6% decline in our 2018 NPAT and EPS forecasts to AUD 280 million and AUD 0.14, respectively.

Further, we reduce our 2019 EPS forecast by 16% to AUD 0.16. The prospectus assumes a first-half 2019 refiner margin of USD 9.70 per barrel, and we’d adopted that figure. But the low refiner margin that has already persisted into January 2019 is likely to pervade for some time yet. Viva calculates every dollar move in the refiner margin impacts EBITDA by AUD 29 million and NPAT by AUD 20 million. We now reduce our first-half refiner margin expectation from USD 9.70 prospectus levels to USD 7.50, before a second-half recovery to an unchanged USD 9.20.

Our Viva fair value estimate equates to a little changed 2023 EV/EBITDA multiple of 8.3, high enough we think given risks. Our fair value estimate equates to a 2023 P/E of 15 times and dividend yield of 3.1%, both discounted at WACC, or 9.9 times and 5.0%, respectively, at today’s fair value. We continue to view longer-term earnings potential as attractive, including a five-year revenue CAGR of 3.7% and underlying EPS CAGR of 14% over the same period.

Margin improvement assumes 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.