Burgers and fuel

RESULT ANALYSIS

Need To Know

• Group 1H23 RCOP EBIT $576m -17% on pcp due to refinery outage.
• Non-refinery earnings still improving, bringing less volatility to group earnings.
• Still room for capital management on conservative balance sheet.

Investment Implications

Result Overview:

1H23 RCOP EBIT $576.3m -17% on pcp

Lytton Refinery RCOP EBIT $100.3m -77% on pcp

Interim dividend 95cps, 69% payout

1H23 result. The normalisation of fuel sales continues with jet fuel sales notably at 90% of pre-COVID levels. Total volumes increased 25% which included a full period contribution from Z Energy (NZ).

Convenience Retail continues to stand out for its improvement as EBIT increased 31% to $167m on fuel sale volume increase of 2.7% like-for-like basis (+1.1% total). Ex-tobacco network shop sales growth on a like-for-like basis increased 5.6% although total shop sales slipped -2.2% including tobacco. The smaller retail site count of 643 perhaps contributed to the higher shop gross margin of 34.9% and a higher average basket value of $12.83, +1.9%.

ALD has rolled out 34 and 37 EV charging bays in Australia and NZ respectively (average charge times 30/25 minutes resp.) and is aiming for 300 bays in Australia by the end of 2024. ALD noted the extra dwell-time of EV vehicles does add to retail spend. Third party agreements will be another avenue of growth such as the agreement with Mirvac for fast-charging bays at its shopping centres.

ALD has signed a Memorandum of Understanding with ENEOS, a Japanese Refinery, to explore the development and production of Sustainable Aviation Fuel (SAF) at Lytton. As airlines attempt to increase the use of SAF in their fuel mix, this could become quite material in future years.

Outlook. Lytton Refining Margins are recuperating quickly from the outage impacted LRMs in 1H23. The 2Q23 LRM of US$5.66/bbl has been followed by the June LRM of US$12.69,/bbl July US$15.39/bbl and August has started solidly. CEO Matt Halliday noted that: “production capacity relative to demand is expected to remain tight” with respect to global refining capacity.

There is still huge potential to unlock further value in the retail business through highway sites and QSR opportunities. The newly re-built Pheasants Nest highway site south of Sydney is an example of how ALD can execute on its premium sites.

The key Ampol/Foodary site on the M1 north of Sydney is about to add a Hungry Jacks outlet, operated by Ampol, on 1 September. This relationship is set to expand further across the network.

The Foodary model will be tiered depending on location into premium, mainstream and small formats. The exited pilot MetroGo sites failed to achieve a satisfactory return on investment for ALD after only being completed late last year. Those stores will be re-branded to the Foodary model.

Investment View

The balance sheet leverage at 1.8x net debt to EBITDA remains well below the target range of 2.0-2.5x, leaving plenty of room for the Board to move. For now, the dividend will be used to lift the leverage to the bottom end of the range, but there is clearly room for more.

1H23 capex of $160m will be followed by new capacity for ultra-low sulphur fuels and aromatics at the Lytton Refinery, depending on the finalisation of Australian fuel standards. The latter project could consume roughly $300-350m gross with the government contributing around $125m. Capex for FY23 is expected to be ~$450m.

This mildly elevated level of capex is arguably holding the Board back in terms of releasing more capital to shareholders although the interim dividend payout was at the top end of policy. Acquisitions appear unlikely, in our view.

The gradual shift towards more non-fuel earnings is progressing while the refinery industry now enjoys the downside protection procured from the government.

The huge year of earnings in FY22 is beginning to look more like where ALD’s earnings future is heading if consensus forecasts are realistic.

We have retained our Buy recommendation.

Figure 1: Lytton Refining Margin US$/bbl

Figure 2: Fuel volumes