Viva Energy’s limp third quarter result was mostly explained by lockdowns in NSW and Victoria. The real story is how the company will respond as the big states re-open and the aviation sector takes off, all in time for Christmas.
The statewide lockdowns across Victoria and NSW during the third quarter this year heavily impacted VEA’s retail business. Retail sales in these states were down 25% on the June quarter with jet fuel sales also impacted due to various state border closures.
Alliance volumes were down to 48.4 ML/week in the quarter but this will clearly not be repeated in the fourth quarter as NSW and Victoria re-open their economies and remove travel restrictions. The end of previous lockdowns has generally resulted in pent-up demand being unleashed and this will certainly happen in 4Q21.
Despite the government support mechanism, Refining EBITDA was only broadly breakeven. This was partially due to lower production with planned maintenance activity. Retail fuel margins were also negatively impacted by rising oil prices and the usual lag in reflecting those increased costs in retail pump prices.
The Geelong Refinery has now returned to full production and the Geelong Refining Margin is quickly rising north of US$10/bbl in the last few weeks. For every US$1/bbl higher refining margin above the government support cap, VEA would generate a further ~A$4.5 million of EBITDA each month.
Investment view
The headwinds have abated and consumers and travellers will be making amends during the fourth quarter. There is also the return of aviation fuel sales to contemplate although this will be difficult to gauge through a volatile re-start period that will extend throughout 2022.
Refining margins are looking better supported, the retail industry is acting rationally, there is upside from the MSO and the scope for VEA’s Energy Hub to evolve as an earnings stream demonstrates that VEA’s future is looking very good.
With the clear reporting from VEA on its underlying earnings, investors can see what the company is trading on from a cash earnings perspective. The share price is undeniably cheap trading on just 6.9x FY22 EV/EBITDA, a 13x PE ratio and a 4.5% dividend yield based on consensus forecasts.
The main risk to earnings is if the Australian economy suffers a reversal from a further round of COVID-induced restrictions. As vaccination rates improve, this seems less likely.
We continue to recommend VEA as a Buy.
