Treasure Chest | Jul 17 2014
By Greg Peel
Since Caltex Australia ((CTX)) made the decision to exit the oil refining business to become purely a distributor and marketer of petrol and related products, the market has perceived the company in a different light. As a refiner, Caltex was forever beholden to volatility in crude oil prices and exposed to lag times between crude oil purchases and petrol sales. It was a tough game.
But when Caltex announced the closure of its Kurnell refinery in Sydney in mid-2012, the transition from energy company to industrial company had begun. The market re-rated the stock on this basis, affecting a 100% rally in the CTX share price to early 2013. Some fresh volatility ensued, given one does not simply hang a “closed” sign on a refinery on the Friday afternoon and start life anew on the Monday morning. The transition was always going to be time consuming and costly, with both factors difficult for analysts to accurately forecast.
In the meantime, more attention has been given to marketing budgets and returns and competition within the fuel distribution business.
Brokers agree that by 2015, this transition should be complete and Caltex will be able to pay attractive dividends as a result of its cash flow-based business. The market appreciates this as well, and hence has afforded CTX a premium within current pricing. Macquarie and Citi, for example, see this pre-emptive valuation as being a bit rich, and hence both maintain Sell or equivalent ratings. The FNArena database shows three Sell ratings at present, with two Holds and just the one Buy.
Credit Suisse (Outperform) acknowledges 2014 was always going to be a tough year as Caltex works through the process of closing Kurnell. The broker nevertheless sees scope for cost reductions in the company’s marketing business and the potential to refinance expensive debt. Hence while Credit Suisse warned earlier this month CTX may yet suffer forecast downgrades, the broker is looking towards a post-Kurnell 2015 with its Buy call.
Bell Potter goes one step further, suggesting 2015 will bring about a second re-rating for Caltex as the company undergoes a second-phase transition to an infrastructure company with a sustainable yield. The re-rating would be reflected in an increase in enterprise value to earnings multiple from mid single digits to double digits, consistent with recent acquisitions in the common space of oil & gas companies with related infrastructure (tanks, terminals, pipelines retail sites etc).
Unlike Credit Suisse however, Bell Potter currently retains a Hold rating, suggesting a second re-rating would not occur until 2015 and there is little chance of a re-rating occurring beforehand, before Kurnell is actually closed and the financial wash-up is known.
Bell Potter has set a 12-month target for CTX of $22.62 compared to current FNArena database consensus of $19.62. Only Credit Suisse, with its Buy rating, exceeds Bells target with $23.80 individually.
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