Viva Energy Group Limited (VEA)
BUY

Snaps up servos

 21 Sep 2022
Sector: Energy

ACQUIRES COLES EXPRESS FOR $300M

Need To Know

  • Headline price will be adjusted for working capital and payables, net price ~$143m
  • Coles Express to generate $45-70m EBITDA as fuel volumes return to 65-70ML/week
  • EPS accretion to VEA of 11-18%

Investment implications

VEA has brought forward its intention to take over the Coles Express business. This is a good deal for VEA as it was to take over the business in 2029 anyway from an owner that was not likely to fulsomely invest in it. VEA can now rebrand the 710 canopies and fully integrate the business into its retail fuels strategy.

Net price ~$143m. The headline price of $300m will be adjusted for $59m of working capital and the settlement of payables of $98m.

11-18% EPS accretive. VEA has guided that it expects Coles Express to generate $45-70m pa EBITDA (pre-AASB16 basis) assuming weekly fuel volume return to 65-70ML/week.

Transaction and Integration costs $120-140m. Associated investments in IT and digital together with the integration and transaction costs over the next three years. This will be comfortably managed through cashflow. Coles Express has 6,000 team members who will join VEA. The Alliance Agreement between COL and VEA will be terminated. The Shell brand will continue under a long term brand licence agreement. COL will continue to supply the convenience stores with Flybuys and 4cpl discount dockets with Coles to continue.

Buyback date extended. VEA has extended the date for its proposed buyback for 12 months to 18 October 2023. Details have yet to be announced. 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.

Our view. 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 and the buyback potential. We reiterate our (strong) buy recommendation.

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Stock overview

Share Price

Company overview

Viva Energy is an energy company that supplies about one quarter of Australia’s liquid fuel requirements. It has 1,345 service stations, owns and operates the Geelong Refinery in Victoria and operates a bulk fuels, aviation, bitumen, marine, chemicals and lubricants business.

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