Reactions to Caltex’s profit warning this week were mixed, with some analysts suggesting the “extraordinary challenges” the fuel supplier had warned of on Thursday were not necessarily as bad as share price movements had indicated.
Caltex said that first-half profit was expected to halve, as it battled Australia’s economic growth slowdown, lower refining margins and high crude prices.
The company was facing weaker domestic demand, partly due to drought conditions, which meant that less diesel was being used for crop planting and harvesting machinery.
In unaudited guidance figures released to the market, Caltex said replacement cost operating profit EBIT was likely to be within the range of $240 million-$270m for the six months to the end of June, down from $443m in the first half last year.
Shares in Caltex plunged almost 24 per cent on Thursday before closing down 13.3 per cent. The share price recovered somewhat yesterday to close up 1.2 per cent at $23.68.
Citi analysts said the share price reaction implied the market viewed first-half weakness as structural, not cyclic, but they were not convinced that that was the case, given their view that retail sales were “unsustainably low” and they forecast an uptick in fuel demand.
Citi said while the Australian economy had softened and did not look set to rebound, weather-related impacts were temporary. They downgraded their mid-cycle earnings forecast by $100m, but said that if Caltex was to achieve that figure, it would be a gain of almost 50 per cent from the current calendar year.
That was assuming no further deterioration in Australian macroeconomic conditions.
“What the share price (reaction) tells us is that the market has capitalised the miss vs expectations,” Citi analysts said.
“Therefore, the market expects the impacts are structural, not cyclic. This seems unfair on our viewpoint of retail industry margins being unsustainably low, and temporary effects of lower rainfall; albeit we do forecast a long ramp-up back to calendar-year 2018 levels of domestic fuel sales.”
Still, UBS analysts downgraded their recommendation to neutral, citing uncertainty as to why retail margins deteriorated so materially in May, given that Caltex saw improving trends in April.
“We see risk to retail targets and sit well below these given increasing competition, management change and rollout delays,” they said.
“The catalysts for us to potentially become more positive are improving refining margins, easing competition in retail and a reaffirmation of retail targets and evidence these are on track.”
Shaw and Partners said the updated guidance was materially below its previous forecasts, but maintained its hold recommendation on the stock, saying it expected refinery margins to improve. “Regional refinery margins are at a multi-year low and drive the Lytton Refinery income,” its analysts said.
“We expect a recovery in refinery margins beyond 2019 due to new shipping industry fuel specs, so we think Lytton income will recover after this half and that is a key driver to our increases in estimates after 2019.”
Extracted from The Australian