Australia | Jun 30 2016
-Refinery discounted on volatility
-Surplus capital to re-invigorate growth?
-Marketing growth to moderate
By Eva Brocklehurst
After a strong 2015 performance, in which both refining and marketing were positive, Caltex ((CTX)) is expected to reveal a more mixed first half. The company has guided to first half profit of $245-260m, with transport fuel volume growth subdued.
UBS reduces 2016 sales volumes forecasts and increases refining costs to bring forecasts in line with guidance. A lack of sales volume growth, despite wins in commercial contracts, is blamed on declines in unleaded petrol and E10 volumes. Despite this, the broker still expects an 8% year on year increase in supply & marketing earnings, reflecting increased sales of premium fuels and a full year of the Tabula Rasa benefits.
The refinery business continues to drag on earnings, with 2015 results abnormal because of high regional refinery margins, Morgan Stanley maintains. The refinery margin has averaged US$9.80/bbl for the first five months of 2016 versus US$16.00/bbl for the same period in 2015. The broker assumes a slight pick up in margins in the second half, to US$11/bbl and notes high utillisation from the refinery has offset the lower margins, somewhat.
Further to this, the performance of the supply & marketing business is much more critical, Morgan Stanley suggests, and likely to generate just under 80% of earnings in 2016. The broker is cautious given the risk of a softening in sales volumes and/or reduced margins over time, as competition in marketing continues to grow.
The market seems to view the refining business as almost impossible to predict, UBS suggests, given its volatility, and largely discounts the value of refining in forward estimates. The broker is inclined to believe the market is correct in this view.
Guidance highlights the challenges of continual growth in profits amid high levels of competition in the fuel sector, and earnings are expected to be uncertain in the face of volatile refiner margins and FX.
Material investment in new growth areas will be required in the medium term, the broker suspects, given a lower growth outlook for Australian transport fuel volumes. The broker wonders just how much more can be obtained from premium fuel and optimising the supply chain, without the need to look for other growth options.
Further investment in the supply chain is low risk but acquisitions could feature, which carry higher risk. UBS expects the company will look to repeat the off-market buy-back in 2017 if opportunities do not eventuate.
Ord Minnett, too, expects surplus capital will be deployed for growth and further capital management will occur only in the absence of material growth options. Moreover, the broker expects the company will benefit from the strong growth in premium fuels, cost savings and the operating efficiency initiatives at Lytton refinery.
Still, the next leg of earnings growth is not yet evident, with refining earnings to decline as margins return to more normal ranges compared with the high levels of 2015. The broker note the very strong second half performance from Ampol Singapore is difficult to cycle.
Ord Minnett continues to believe the risk/reward ratio is attractive and supportive of valuation, and remains confident the company can allocate capital judiciously. The recently upgraded Buy rating is maintained.
Macquarie acknowledges the positive elements in the update, particularly in supply & marketing, but does not expect this to offset the rapid normalisation in refining margins from Lytton. Hence, Macquarie's rating is downgraded to Neutral.
The broker expects supply & marketing growth to moderate going forward, given the lacklustre outlook for mining and the consumer economy. Macquarie forecasts the growth trend will revert to low single digits. In refining, margins are now forecast to be in keeping with long-term averages.
FNArena's database has three Buy ratings and four Hold for Caltex. The consensus target is $34.68, signalling 8.7% in upside to the last share price. This compares with $35.43 ahead of the update. The targets range from $32.60 (Morgan Stanley, UBS) to $40.00 (Credit Suisse, yet to comment on updated guidance).
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