The share price of fuel retailer Caltex Australia Limited (ASX: CTX) has jumped 6% to $35.50 on news that the Australian competition watchdog is opposing the sale of Woolworths Group Ltd’s (ASX: WOW) petrol stations to rival BP Australia. Also, UBS thinks Caltex have more room to climb.

The broker turned bullish on Caltex as it noted that BP would have cancelled its 3.5 billion litres per annum supply agreement with Caltex as soon as the acquisition was completed. The impact of the cancellation is estimated to have put a $150 million hole in Caltex’s accounts.

BP and Woolies have the option of challenging the Australian Competition and Consumer Commission’s (ACCC) decision but even that will take time. The longer this drags out, the longer Caltex will continue to receive revenue from its supply agreement with Woolies.

However, the earnings impact is likely to be less than the $150 million that management had flagged, according to UBS.

The broker notes that management had been counting on achieving some cost savings if the supply agreement were to be canned and this is why the broker is only forecasting a $125 million uplift to Caltex’s earnings before interest and tax (EBIT) if the company can keep its contract with Woolies.

“If BP and Woolworths seek to have this decision overturned, it would, at the very least, cause a delay in the cancellation of the fuel supply agreement, which we had anticipated would occur in 1H18,” said the broker.

The broker has upgraded the stock to “buy” from “neutral” and lifted its price target on Caltex by $4.10 a share to $39.10 to reflect the increasing likelihood that Caltex will retain the supply agreement with Woolies following the ACCC’s objection to the deal.

The ACCC is blocking the sale of 531 petrol stations owned by Woolies to BP as it believes the transaction will substantially lessen competition in the retail fuel market and hurt consumers.

I believe Caltex looks attractively priced and the market hasn’t yet factored in much upside from its growth options following the restructure of its operations. The market has instead been more focused on the competitive landscape for the petrol station market and the global trends towards electrification of vehicles.

The stock is up over 16% this calendar year when the S&P/ASX 200 is lagging with a 5.8% gain.

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Extracted from The Motley Fool.