At least some companies will be quietly celebrating the world’s energy shambles. Viva Energy has diligently gone about its business of supplying Australia with the fuels and distillates it needs for everyday business and leisure.
We begin our analysis by highlighting the group underlying free cash flow of $494 million, an increase of 243% compared to the same period last year. Of that, $309.5 million came from Refining which barely troubled the scorer last year at $12.7 million.
Next, Retail, Fuels and Marketing (RFM) delivered a competent outcome with Commercial EBITDA of $164.3 million up by 55% as aviation volumes returned and new customers came on board.
Refining took in 21.5mmbbls of crude and turned it into $370.8 million of EBITDA, thanks mostly to the US$19.90/bbl average GRM (Geelong Refining Margin). The GRM was just US$6.10/bbl in 1H21. Global refining margins soared in the second quarter due to high demand for refined products, particularly diesel. What’s more, refinery closures, reduced exports from China and the impact of sanctions on the purchase of Russian oil all conspired to push margins even higher.
Gravity intervened in July as the GRM slipped to US$15.20/bbl and an unplanned outage at Geelong in August will cost the company ~US$5/bbl of margin at the end of the month.
The Board’s dividend policy is in two parts. Part one is to pay 50-70% of the RFM net profit. Part two is to pay 50-70% of the Refining net profit but on an annual basis. VEA’s interim dividend included the refining margin brought forward from the end of year assessment.
Investment view
When you win the Lotto (as you do), you suddenly discover how many new friends you have. Why then does VEA’s share price look like a 6th division prize, and no-one wants to hang out with Scotty? When CEO Scott Wyatt dryly announced VEA’s interim profit figures, even a casual observer might have put down his beer and rubbed a blurry eye before taking a second look.
For too long, VEA’s Geelong Refinery has looked more like George McFly than Pete “Maverick” Mitchell. Cue a global energy crisis, together with a government safety net and voila, in one half year period it delivers more than double the EBITDA than the previous four years combined (Figure 2).
The important point to take out is that on a mid-cycle refining margin of US$12.50/bbl, VEA is trading on just 5.5x EV/EBITDA and a PE ratio of barely 10x FY23f EPS on consensus forecasts, not to mention the 5.3% net dividend yield.
Looked at another way, lining Geelong up against global refineries at the bottom end (5x EV/EBITDA), the residual value says the rest of VEA is valued at 4x EV/EBITDA and a 17% free cash flow yield.
We estimate VEA has headroom of more than $1.4 billion at the lower end of its target gearing range (1.0-1.5x). A (conservative) $500 million buyback would be more than 7% EPS accretive.
Should things turn to custard, and the government support mechanism kicked in, VEA would still have $1 billion of balance sheet freedom to get to the bottom end of its target gearing range.
Heads and brick walls do not mingle well. This stock is a buy.
Risks to investment view
The price of crude oil can be volatile, and it affects not only refining margins but retail and commercial demand for refined products. Economic activity also determines the level of demand for VEA’s products, so if this turns negative, it would affect earnings.
Recommendation
We have retained our Buy recommendation.
FIGURE 1: 1H22 RESULT
FIGURE 2: VEA EBITDA (RC)
