Retail fuel volumes are expected to turn around quickly as Australians start driving to work again and domestic travel resumes, underpinning the outlook for Viva Energy ((VEA)). Credit Suisse considers the company’s update a clear positive relative to some bearish forecasts, and notes guidance for net profit of $20-50m for the first half implies a $30m FX and oil derivatives benefit.

Goldman Sachs retains its more conservative forecasts but notes industry feedback that signals a stronger recovery in volumes, with the run rate equivalent to 90% of demand prior to the pandemic. Morgans, while encouraged, assesses the positive news is probably not enough to offset weak investor sentiment, which has been bedded down over multiple years of difficult operating conditions.

However, there is now an opportunity, the broker suggests, as the stock is at a discount to valuation. The business is leveraged to a recovery in fuel volumes and easing restrictions should result in higher domestic fuel demand, while the potential recovery in international travel, i.e. aviation, appears longer dated.

The business is cyclical by nature, UBS points out, which explains a large historical price/earnings (PE) discount compared with the market. However, at around 13x 2022 PE estimates (considered to be the “normal” year) the broker believes the risk/reward is attractive.

Guidance for the first half operating earnings (EBITDA) of $257.5-287.5m is well ahead of UBS estimates and drives a 56% upgrade to its 2020 forecasts. Volume pressures appear to have been more than offset by strong retail margins but the benefits are starting to wane, the broker notes.


Retail fuel volumes declined in the first half of 2020, offset by an increase in retail margins because of a weakening wholesale price. Credit Suisse assumes volumes return quickly to pre-pandemic levels in the second half and margins are reduced as wholesale prices increase.

The key issue for Morgan Stanley is whether the retail fuel market has now turned around while expecting retail fuel margins will move structurally higher after 18 months of intense competition and lower profits.

Ord Minnett agrees retail earnings remain supported by a rational industry structure which has experienced significant retail fuel margin expansion in 2020. The irrationality that pervaded 2019 appears to have passed. Moreover, despite an already-lean cost base, Viva Energy has been able to reduce costs further and the broker is pleased with the judicious approach to capital expenditure.

Demand throughout the winter from cruise companies is likely to be lower while resource, transport and specialties have been relatively unaffected by the pandemic.

Aviation is the main uncertainty and Credit Suisse assumes volumes recover to 40% of the pre-pandemic levels in the second half and 70% in 2021. The Geelong refinery will be operating at 70% of capacity from July to October. Capital expenditure guidance for 2020 has been lowered because of the deferral of a major turnaround of the HFA unit to 2021.

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