Australia’s petrol refiners are just weeks away from pulling the trigger on deals worth billions in a shake-up that will also test investor appetite.
As revealed by my sister column DataRoom online yesterday, brokers have started sending out pre-float valuations on the Viva Energy business that is being put on the market after four years of ownership by Swiss trader Vitol, with a sale likely by the middle of the year.
At the same time, Woolworths is said to be just weeks away from making a decision on whether to pursue a sale of its petrol stations and convenience stores to BP or consider other options after the competition watchdog blocked the sale in December. Meanwhile, Caltex chief Julian Segal is set to break out the accounts of his service station business for the first time. Investors will get a look at numbers for the June half year in August, stoking talk about the future of that business.
It’s interesting timing, with the slate of transactions in the industry coinciding with a slide in refiner margins. A month ago Caltex released figures showing its refiner margin for the three months to March 31 was $9.40, down 23 per cent on the same period a year earlier. Refiner margins have been falling as the retail price rises.
As the only direct comparison stock in the market, Caltex’s performance also provides a necessary reference for the Viva float.
Deutsche analysts use the 13.1 times price-to-earnings ratio implied by Caltex’s low share price levels as the bottom and the five- year average of 14.6 times to come up with a range of $4.87 billion to $5.43bn. Brokers UBS and Bank of America Merrill Lynch have also released research valuing the company at between $4.3bn and $6.3bn.
If it lists at near the midpoint of that wide valuation range of $5.3bn Vitol will have done very handsomely from its custody of the business, doubling its money. It paid Shell $2.9bn in 2014 for the downstream assets that included the Geelong refinery and the 870-site retail business, as well as bulk fuels, bitumen, chemicals and part of its lubricants businesses in Australia. It has already harvested some of that back via the sale of the service station properties into a $1.5bn real estate trust.
The big increase in value can partly be explained by Viva’s leaner management style, with capex declining since 2016, but primarily it has benefited from an increase in refiner margins.
Investors looking at the shares will have to at least consider the smarts of the vendor, which is the world’s biggest independent oil trader, in the timing of the sale.
They will also have to consider the relative lack of pricing power the business has. High among the risks in the business identified by Deutsche is that the alliance with Coles is a material part of Viva’s marketing operations.
The operation of the retail sites, including the setting of the price and the operation of the convenience stores is up to Coles Express, meaning it can affect Viva’s profitability.
Coles got a bad review in the Australian Competition & Consumer Commission report on retail petrol prices this month, which found it to be the most expensive fuel retailer in all five capital cities, its prices 12-18 per cent above the average. That could be read as meaning that Viva is selling at a time when petrol prices — at least at its supplied venues — are high.
Woolworths’ prices, along with those of the independents, were among the cheapest and that is helping to create another headache for CEO Brad Banducci.
Reprising his predecessor Alan Fels’ role as a “bowser wowser”, Rod Sims has blocked the sale of the Woolworths service stations, stalling the retailer’s plans to pay down debt and maybe return some capital to shareholders
The clock is ticking on the sale agreement between Woolworths and BP for 525 service stations after it was blocked by Sims at the ACCC on the grounds it would substantially lessen competition. Sims said BP was among the higher-priced retailers, so the sale of Woolworths sites would mean consumers paid more for fuel.
Banducci indicated on the most recent investor call that the agreement terminates around the middle of the year and the further it gets from the December ACCC decision, the less likely it is looking that either side will challenge the ruling in court.
At the same time, it’s not obvious how the sale could be restructured to appease the ACCC.
The first report card on the impact of new European rules on broker research on the Australian market does not make pretty reading for ASX boss Dominic Stevens or James Shipton at the corporate plod.
A survey of investor relations practitioners finds 71 per cent of top 100 companies have witnessed a decline in the number of analysts covering them in the past 12 months. And 47 per cent say they have seen a decline in the quality of research, according to the Australasian Investor Relations Association.
In some companies that is a direct result of many investors refusing to pay new charges required under the so-called MiFID II law for research, conferences and meetings provided by brokers. They are being felt beyond the European borders with some banks and even international fund managers exporting them to Australia for the sake of consistency.
Questions of quality can be hard to measure, but can also be reflected in numbers such as how many brokers are contributing to consensus earnings estimates, and how often they are updated.
Investment bank UBS has, for example, withdrawn from contributions to the Bloomberg consensus estimates.
AIRA cites 46 broking analysts moving in the past 12 months, with a third of them going to the buy side as a reflection of the decline in coverage and quality. AIRA chief Ian Matheson says that in their place there are more junior analysts covering more stocks and sectors and lacking the time for more in-depth coverage.
The rules had their first test after the February reporting season when companies headed off on overseas investor roadshows and more than half the respondents to the survey said they met fewer investors in London this time around because of the new rules.
It’s getting harder for the big banks and brokers to arrange the complete investor tour through locations like Hong Kong, London, Edinburgh and New York. If the investors don’t have specific contracts for corporate access with the brokers they can’t take the meetings.
That is likely to have some consequences for Stevens at the ASX because it could limit future international interest in the Australian market, as well as fuelling concerns about the depth of coverage for local investors.
Extracted from The Australian