Investors appear to be more patient than investment bankers when it comes to the prospects for dealmaking by Caltex Australia, while acknowledging that the fuel supplier is undervalued in the market due to doubts around a profit uplift targeted in the retail business.

Bankers are said to be crawling over Caltex’s portfolio and pitching various restructuring and break-up plans intended to unlock value from the company’s property, retailing and infrastructure assets.

Still, investors are mostly satisfied that Caltex has examined and rejected a potential sale-and-leaseback arrangement for its network of service stations, particularly in light of a recent change in accounting standards.

Vertium Asset Management portfolio manager Jason Teh said a move now to spin off the property assets could pass the benefits of the convenience retailing revamp to a new owner.

“You won’t benefit in the uplift unless you continue to hold the property assets,” Mr Teh said, adding that he expected no big moves in that direction until Caltex’s new convenience retail strategy got closer to maturity.

In any case the change in accounting standards – specifically AASB 16, which became effective in January – makes it difficult for Caltex to justify a sale-and-leaseback now, said Matthew Blumberg at Hayberry Global Funds. He said a change in the treatment of leases effectively increased the enterprise value of the company.

“Ultimately, on a comparative basis, Caltex would then look more expensive compared with its historic multiples,” Mr Blumberg said, voicing doubts that Caltex rival Viva Energy would have spun off its service station sites into a real estate investment trust if it were making the decision now.

Co-operation still important

Meanwhile, Caltex’s move early last year to divide its assets between the divisions of convenience retail and fuels and infrastructure has triggered musings among dealmakers about a potential demerger or sale of one part. But Caltex chief executive Julian Segal has consistently underscored the imperative of strong co-operation between the two.

“We separated the business financially so that we can give visibility to the market in the two business units,” Mr Segal said after the annual shareholder meeting on May 8, saying close co-operation was important to optimise the fuel value chain all the way from the procurement of crude and fuel products to the retail sites.

Caltex declined to comment on the latest speculation about potential deals. But speaking after the AGM, Mr Segal reaffirmed the conclusion that selling the retail sites into a REIT was “not going to achieve any particular aim for us” and emphasised a continuing focus on releasing franking credits to shareholders. Caltex last month completed a $260 million off-market share buyback.

New chief financial officer Matthew Halliday, previously of Rio Tinto, would be “very much on the lookout for any opportunity to increase returns for shareholders using any capital tool that we’ve got at our disposal”, Mr Segal said.

At the time, Mr Halliday said Caltex would continually examine the application of its capital allocation framework across the business “to make sure that every asset in the organisation is maximising returns”.

Still, investors are keen to hear directly from him to get a better feel on strategic thinking within top management, given the valuation disconnect they perceive between the inherent value of Caltex’s portfolio and its traded value.

They point to doubts in the market around Caltex’s ability to achieve its 2024 target to add between $120 million and $150 million in profits at the retail business for the underperformance of the stock, which is among the laggards in the ASX’s benchmark energy index over the past year.

“It’s understandable that short-term investors would be looking to break the company up and realise the valuation upside immediately,” Mr Blumberg said. “However, there are clear and significant synergies between the businesses, and I think this is what management should really address.”

Mr Blumberg said it would also be “interesting” to see how Caltex moved forward with capital management in light of its high franking credit balance.

Hayberry’s Mr Teh said as long as Caltex remained within its gearing targets, he expected the company to continue to release franking credits each year through off-market buybacks.

Extracted from AFR