-Timing lags in commercial fuel contract renewals puts pressure on margins
-Earnings opportunity over the next 2-3 years amid improving retail volumes
-Path towards retail fuel expansion likely to remain bumpy
As largely expected,
Top-line revenue remains strong and volumes are up 4.3%. However underlying net profit guidance of
It has been a difficult year for the company, Morgans points out, with refining, retail and commercial segments all under the pump at various points in time. The broker trims estimates for 2019 in line with the guidance, which means a -23% reduction in 2019 estimates for earnings per share.
Commercial
In commercial fuel, guidance implies a reduction of -13-17% in operating earnings, implying a step-down in the second half, given margin pressure on contract renewals and rising freight costs which have not been passed on until after the expiration of short-term contracts.
However,
Credit Suisse calculates guidance for the fuels marketing segment as a whole implies a -16% reduction in operating earnings/litre in the second half. A number of short-term factors have affected refiner margins in the second half such as light sweet crude premium and an adverse turn in transport markets.
Credit Suisse expects refining margins will deteriorate following the IMO2020 transition. In contrast, while refining margins remain difficult to forecast,
Retail
Meanwhile, retail margins have continued to deteriorate in December with both diesel and automotive gasoline down. Costs have clearly been an issue here is well. Volumes were better, up 9% in the second half, as the company is regaining retail market share.
The company has, by its very nature, a volatile business and this is reflected in a high PE discount to the market. Nevertheless, the broker envisages a significant earnings opportunity over the next 2-3 years amid improving retail volumes, while 2019 and the first half of 2020 are likely to reflect a period of reinvestment.
Credit Suisse finds the valuation reasonable albeit not compelling while potential sale of the company's interest in
Coles
Since the new fuel deal with Coles ((COL)), the company is targeting alliance volumes of 70-75m litres per week which is below the more than 100m litres recorded in 2015.
Yet the broker suspects consensus estimates in this regard are optimistic. Averaging 65m litres of fuel per week in the December half, Morgans assesses
Nevertheless, with a stronger independent sector that has a potentially different return-on-capital hurdle and time horizon, the path towards retail fuel expansion is likely to remain bumpy.
FNArena's database has three Buy ratings and two Hold. The consensus target is
FNArena is proud about its track record and past achievements: Ten Years On
All material published by
© 2019 Acquisdata Pty Ltd., source