Australia | Jul 13 2015
-Balance sheet gets stronger
-Special dividend on the cards?
-What will happen at Lytton?
By Eva Brocklehurst
Brokers have mixed views on the performance of Caltex ((CTX)) in the first half, largely because of the difficulty in untangling the trend from a restructure of divisional reporting. The company reports marketing and supply together now instead of reporting supply with refining, given its refining assets are reduced to one in Australia, the Lytton refinery in Queensland. This makes comparisons difficult until the final half year report is delivered in August. Nevertheless, brokers generally found the update reasonably positive.
Transport fuel sales volumes were soft in the half but retail segment sales continued to grow. The output at Lytton was solid despite time out for major maintenance while refining margins were strong. UBS forecasts a refining margin of US$12.0/bbl in the second half and US$9.0/bbl from 2016.
Credit Suisse finds it hard to get a true picture now that marketing is is integrated with supply and awaits the results briefing for more clarity. Nevertheless, the broker considers the balance sheet is "primed for use" and with acquisitions in New Zealand seemingly no longer an option, and no sign that BP's Australian assets are about to be offered for sale, it would a positive move if Caltex could reward shareholders with an early special dividend at the first half results. Credit Suisse maintains the stock is high quality and defensive with many infrastructure-like qualities. Watch this space, the broker maintains.
Morgan Stanley suspects marketing performance will be the key to the stock going forward. There has been a doubling of marketing margins over the past seven years and significant volume growth. The broker notes this is the first time there has been a drop in transport fuel volumes for some time, which may reflect a more challenging environment. Macquarie expects Lytton earnings will be supported in the second half by the depreciating Australian dollar, healthy margins and increased premium gasoline following the upgrade. By year end balance sheet surplus capacity should be in the realm of $500m or more, providing greater scope for acquisitions or capital management, in the broker's view.
The focus is on business optimisation after the closure of Kurnell but Citi maintains there is risk to consensus forecasts in the longer term, while accepting the outlook for growth is unlikely to be challenged in the short term. The broker downgrades to Neutral from Buy given recent share price strength. JP Morgan was disappointed in the update but attributed this mostly to timing issues in terms of volume and commercial pressures on the transport fuel margin.
Marketing earnings will now be more volatile, UBS suspects, thanks to this timing lag and the impact of product payables. The broker questions whether the change to the way the business units are reported means refining is on borrowed time. Lytton has benefited from strong margins over recent months but refining margins are likely to decline sharply in the second half, given the supply available in the market. Despite being profitable at a refiner margin above US$6.50/bbl UBS believes Caltex will consider closing Lytton and convert it to an import terminal later in the decade. The broker also maintains that, with the lack of material acquisition opportunities, the company will have to become more innovative about growing its business.
FNArena's database contains two Buy ratings, four Hold and one Sell (UBS) for Caltex. The consensus target is $33.93, suggesting 4.8% upside to the last share price. Targets range from $31.00 (Macquarie) to $40.00 (Credit Suisse).
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