A fresh downturn in petrol demand in virus-hit Victoria has helped keep Ampol highly cautious on returning capital to shareholders from its $682 million retail property sale, while the first-half dividend has been slashed.

While fuel sales across Ampol’s retail network had recovered to almost 90 per cent of year-earlier levels in July, sales so far this month are down 18 per cent from August last year, almost entirely due to Victoria.

Ampol opened its first sites under its rebranded name in Sydney last week. 

“Clearly Victoria going back into stage four restrictions in August has had a meaningful impact,” chief executive Matt Halliday told The Australian Financial Review.

He called on governments to take a balanced view on economic recovery and border controls to protect public health.

“The other markets …we’re getting much more closely back to where they were, and you’ve seen Victoria obviously heavily go the other way.”

Mr Halliday said the decision to put capital returns for shareholders on the backburner was justified given the uncertain outlook and weak refining margins as the pandemic continues.

Proceeds from the sale of a 49 per cent stake in a service station property spin-off to Charter Hall and Singapore’s GIC, announced last week, will initially be used to pay down debt, with a capital return or growth investments to be considered only as market conditions improve.

“It’s a prudent approach to the balance sheet which – given the uncertainty we continue to see and the volatility we continue to expect – I think makes sense as we navigate through what COVID looks like in the coming months,” Mr Halliday said.

The former Caltex Australia, which was the target of an $8.8 billion takeover approach from Alimentation Couche-Tard before the Canadian firm walked away in April, posted an 11 per cent slide in first-half benchmark profit to $120 million.

The bottom line plunged to a loss of $626 million because of large write-downs as a result of the COVID-19 pandemic.

Ampol’s refinery in Brisbane sank to a $59 million loss, while earnings in the rest of the fuels and infrastructure business were also lower, more than cancelling out the effect of higher profits from convenience retailing.

Ampol, which rebranded the first two of is petrol station sites under its new name last week. declared an interim dividend of 25¢ per share, down 22 per cent and lower than analysts were anticipating.

The shares closed down 4.4 per cent at $26.96.

The petrol and diesel supplier had refrained from giving its usual profit guidance in the lead-up to the results, citing the COVID-19 uncertainty.

RBC Capital Markets analyst Gordon Ramsay said that while the result was a little softer than he expected, the weakness at the Lytton refinery was to be expected given the pressure on refining margins before Ampol decided to shut the plant for extended maintenance work.

Weak Asian refining margins had fuelled some speculation that Ampol may keep the plant closed for longer, but it advised this month it would restart it in September, although not at full output.

It is also in talks with government about potential contracts that would assist with fuel security strategy, while Canberra is reviewing the refining sector more broadly in a revived bid to retain critical manufacturing.

“Market conditions remain very challenged but we can see that the right decision at the moment is to run the refinery, and we’ll ramp it back up in a very safe and considered way,” Mr Halliday said.

Ampol’s bottom line was hit by $355 million of charges, including an $80 million impairment of Lytton and a $233 million write-down of convenience retailing, mostly on non-core sites.

Ampol also advised it has been selected by Transport for NSW as the preferred redeveloper of four highway service centres west and south of Sydney.

The company expects to spend about $100 million in 2021 and 2022 on the sites, with anticipated returns of at least 15 per cent.

Mr Halliday said the sites, the property sale and the rebranding showed Ampol was getting on with creating value for shareholders no matter what Couche-Tard did.

“If Couche-Tard or if anyone else wants to come along and think that they can extract more value from the business and pay a premium for it that is appropriate, then of course we will consider that on its merits, but what we are focused on is how we are going to unlock and create value for shareholders,” he said.

RBC’s Mr Ramsay pointed to a “strong likelihood” talks with Couche-Tard would resume once the economic outlook is more certain.

Extracted in full from: https://www.afr.com/companies/energy/vic-setback-keeps-ampol-cautious-on-capital-return-20200825-p55p4u