Will Willitts, 24 December 2015

Credit Suisse has an “outperform” recommendation on Caltex (CTX) and a $40 target price.

“In the early 2000s, the relevance of major downstream import infrastructure was equally as trivial in a market that was long refining capacity, and hence product, until 2003 when Exxon closed Port Stanvac … today … we see infrastructure as the key to the entire market.

“Caltex may view the infrastructure as a cost, not a revenue generator, but a disaggregator might not. Kurnell receives >10 per cent of total Australian fuel needs (~40 per cent of NSW’s), owns its own wharf and can receive LR ships. With ports sold for >25x EV/EBITDA in the past 12-18 months, the value is well hidden in Caltex. Kurnell in particular enjoys cost advantages that others don’t, entirely justified by the capital it has spent.

“We try to (gu)estimate a disaggregation of Caltex’s 5.8cpl 2016 margin, allocating 3.5cpl to premium infrastructure at Kurnell (so for the ~5.5BL that goes through it). … we also assume Lytton operates as an import terminal (i.e. no refining earnings) and apply the same 3.5cpl. With a view that other infrastructure may have less of the scale and competitive advantages, we apply 2.5cpl of the margin to the residual volumes through infrastructure at the entry point into the country. This leaves a weighted average ~2.7cpl of margin for distribution/retailing across all volumes.

“Having estimated an opex split, we put the high quality infrastructure (Kurnell and Lytton) on 20x EV/EBITDA, the residual volumes on 15x (Caltex owns 16 terminals + 8 host terminals), retail/in country distribution on 10x, non-fuel on 8x and Lubes on 6x. This gives a valuation of ~$40.50/sh pre-franking credits. It excludes upside from further volumes (owned or hosted) at Kurnell and Lytton. All this is off a synthetic FY16 EBITDA of ~$760mn, vs the ~$1,080mn we model with Lytton as a refinery. We continue to believe that, if the market and Caltex don’t value this infrastructure properly, others might.”

Extracted in full from the Australian Financial Review.