The mega float of Viva Energy has underlined to fund manager Chris Tan that Australia has a “really impressive” fuel distribution industry, which the rest of the market doesn’t appreciate.
Mr Tan, co-manager of the $20 million Pengana Australian Equities Income Fund, bought into the $2.7 billion raising for Viva Energy that was ruled off on Wednesday, pushing the fuel refiner and retailer to the boards with a market value of $4.9 billion.
Although he reckoned the marketing campaign for the company did a very good job highlighting the underlying strength of the fuel distribution industry in Australia, as an investor in Caltex it was old news to him.
“We think that the market has really undervalued these companies,” he said.
The initial public offering of Viva, the biggest for the ASX since Medicare Private’s $5.7 billion debut in November 2014, serves as a reminder of the “vital” place of fuel in the economy and the industry’s long history, Mr Tan said.
The fund manager noted a market discount has been applied to Caltex due to concerns the introduction of electric vehicles will make petrol cars obsolete, but said. “It will happen, but it’s a long way off.”
Viva Energy chief executive Scott Wyatt made similar comments in June, noting that while electric vehicles would have an impact “over time”, they still accounted for only about 0.1 per cent of the vehicle fleet.
Mr Tan said the fuel distribution market is now more rational in Australia after stripping out overcapacity.
Viva operates a network of more than 1200 service stations under the Shell brand. Viva’s Shell Coles Express outlets are run in conjunction with Wesfarmers’ Coles division. The company also has a refinery business, which accounts for just under one-quarter of underlying earnings.
Companies are also following UK firms and expanding their retail convenience offerings, he said. Passport services and click-and-collect services are potential future offerings to provide another leg of growth for these firms, he said.
The Pengana Australian Equities Income Fund takes a high-conviction view on between 20 and 40 stocks and favours those that distribute a high proportion of profit as dividends.
According to its prospectus, Viva Energy expects to deliver investors a dividend yield of 4.3 to 4.9 per cent in 2018-19, based on paying out 60 per cent of underlying net profit in the year. The company will trade at a forward price-earnings multiple of 13 times.