Flashnote

Event

  • Petrol retailers have hiked prices sharply over the last week (e.g. above $2.20/L across many Sydney & Melbourne sites), and several state premiers are now calling for a reduction in the federal excise to buffer the inflationary impact.

Impact

  • Petrol price increases healthy for retailers: Petrol retailers suffered reduced fuel retailing margins in recent weeks (from 15c/L in 4Q21 to 10c/L in February), and so a price increase was necessary in our view to pass on the higher import cost of fuel. It is therefore pleasing to see that the fuels industry is behaving rationally and protecting returns during this challenging period for oil markets.
  • Fuel excise being debated: Fuel excise is levied at a rate of 44.2c/L on retail petrol (periodic indexation of the excise rate was reintroduced in 2014 under the Abbott government). The debate into the federal election will likely focus on (i) removal of indexation or (ii) reduction in the excise rate. Either of these levers would clearly reduce inflationary pressure, but also reduce federal tax revenue (excise remains an important part of the budget, albeit less significant than back in 2014 when this issue was last debated with the same focus).
  • Premium fuel downshifting: When oil prices are high – and particularly when there is a fast escalation in prices on the forecourt – we tend to see consumer downshifting to lower grade/less expensive fuels (VEA portfolio has 31% premium penetration, ALD 40%). Feedback from fuel companies has been that we are seeing this again in this current up-cycle. Given premium fuel contributes disproportionally to fuel retailing profitability, this poses a headwind to 1Q earnings for VEA/ALD (in addition to flood & rainfall impacts). Any reduction in pricing at the pump – regardless of whether due to a fade in international prices or a reduction in the federal excise – would likely help to improve premium fuel uptake.
  • Electric Vehicles: Taxation of EVs relative to traditional ICE vehicles will remain a point of debate – vehicle numbers are currently insignificant but are beginning to grow more meaningfully (and much higher oil prices will make the case for an EV purchase more compelling for motorists). Federal & state governments became far more supportive of EVs in 2021, with significant subsidies now in place toward the purchase of an EV (e.g., $3k in NSW), stamp-duty reductions/exemptions and a subsidised plan to expand the charging network. EVs are exempt from paying fuel excise tax, but some states have attempted to implement “road tax” on a per km basis.

Outlook

  • Maintain Outperform on Viva Energy. We are on rating restrictions on Ampol.
  • What matters most for VEA/ALD are the fuel retailing margins – it should be pleasing to investors that these margins are being protected (and making up for soft margins in February). Any reduction (or pause to indexation) in fuel excise would be helpful in protecting demand & premium penetration.
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Speak to our analysts
Mark Wiseman, CFA
Macquarie Securities (Australia) Limited
+61 418 375 283
mark.wiseman@macquarie.com
Toby Arthur
Macquarie Securities (Australia) Limited
+61 410 746 272
toby.arthur@macquarie.com

 

Extracted in full from: wwMacquarie Research eqgmagres@macquarie.com

 

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