Australia | Jul 04 2006
By Terry Hughes
Caltex’s (CTX) latest profit guidance has caused most analysts to raise their earnings forecasts for the company, but the recent share price run, up 20% over the past two months, has left only Merrill Lynch with a Buy recommendation on the stock.
Following the company update, Merrills lifted its replacement cost operating profit (RCOP) forecasts for 2006 by 5% to $419m and its target by 13% to $26.50, with the stock currently trading at $23.72.
So why is Merrills more bullish on the stock than its colleagues at other brokerages?
While 1H06 Singapore refiner margins were US$9.50/bbl, compared to US$6.48/bbl in 1H05, the analysts point out that not all this margin was actually realised by Caltex due to the fact that given the delay in the Clean Fuels project, the company was required to "import 2006 spec product and export off-spec product", the broker says.
On the company’s estimates, this delay cost around $80-100m, which the analysts say implies a potential second half RCOP of $240-270m. This would result in a full year figure of $400-440m if margins remain at current levels, and historically margins are normally stronger in the second half of the year.
Merrills sees further upside potential coming from benefits delivered by the refinery performance improvement program, which have been estimated at $150m in EBIT per year, and while the cost of the program has already been factored into the broker’s forecasts, only a portion of the earnings benefit has been taken into consideration so far.
In addition to this, the broker is of the view that refining capacity will remain tight until later this decade while also pointing out that the majority of projects planned to increase capacity in 2009 and 2010 are still to be approved.
This leaves open the possibility for higher long term refiner margins, and the broker’s current forecasts are based on a long term average of US$3.75/bbl. At a margin of US$6/bbl, the broker calculates its valuation on the stock would rise to $29.20, from the current $22.80.
Funnily enough, the guys at UBS are of the view that refiner margins will take several years to revert back down to US$6/bbl by 2009.
UBS is now expecting a FY06 result of $466m, up from $420m before the latest guidance, but has lowered its recommendation to Neutral, due to the share price appreciation.
However, the broker does point out that it expects a dividend payout ratio of 40% for 1H06, and of 60% thereafter, and Macquarie agrees, while also highlighting the possibility of special dividends.
According to ThomsonOne Analytics current market expectations are for a reported FY06 net profit between $453.34 and $367.30 (this means the latest updates such as UBS’s still have to be included – the system shows the trend is upwards though).