We recently researched Viva Energy Group (ASX:VEA) in The Dynamic Investor, as the shares appeared oversold. The stock’s 1-year forward P/E multiple has improved from 11x to 12x in a short space of time since our research report. Accordingly, we consider whether there is scope for a further recovery.
About Viva Energy Group
Viva Energy Group is one of Australia’s leading energy companies and supplies approximately a quarter of the Australia’s liquid fuel requirements. The Company is a Shell licensee and the exclusive supplier of high-quality Shell fuels and lubricants in Australia.
VEA listed on the ASX in 2018 following restructure of Viva Energy Holdings and has three operating segments:
1. Retail, Fuels and Marketing (RF&M) – Retail: Comprises a national network of over 1,330 retail fuel and convenience sites which are operated through various channels. These include Coles Express (710 sites), Liberty Convenience, and sites operated by independent dealer owners.
2. Retail, Fuels and Marketing – Commercial: VEA is a significant supplier of fuel, lubricants and specialty hydrocarbon products to commercial customers across multiple industries.
3. Refining: The Company owns and operates the strategically located Geelong Refinery in Victoria.
Key Fundamental Drivers
Expansion Into Convenience Retailing Taking Shape
Over the last 12 months, VEA has made significant steps towards repositioning itself as a convenience retailer that sells fuel. This is in contrast to being a fuel retailer with a convenience offer. An expanded convenience retail offering is becoming increasingly important for the industry. The key reason for this is the trend towards electric vehicles in the passenger car segment, which is expected to accelerate. In turn, this is likely to lead to a structural decline in fuel volumes over the long-term.
In September 2022, VEA announced the acquisition of Coles Express for $300m. The acquisition creates the largest fuel and convenience network under a single operator with 710 sites. Subsequently, the Company acquired the fuel and convenience business OTR Group (‘OTR’) in early April 2023 for $1.15b. The acquisition of OTR will see VEA on a path to 1,000+ sites. It also introduces a large number of quick service restaurants. The latter is likely to benefit VEA from the viewpoint that consumer preferences are recently trending towards lower-priced items. In addition, OTR’s convenience sales are ~2x that for Ampol & Coles Express.
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Earnings Impact from Refinery Shutdown Overstated
In early May 2023, VEA commenced a major 8-week turnaround at the Geelong Refinery to coincide with a fall in regional refining margins. The planned refinery turnaround (and this extended outage) coincides with a period of lower refining margins.
As a result of the outage and lower regional refining margins, the Company’s Geelong Refining Margin (‘GRM’) is expected to decline from US$17.10/bbl in FY22 to ~US$13/bbl for FY23. Importantly, the GRM is expected to recover in FY24. This increases the likelihood that the market looks beyond the immediate earnings impact from the refinery shutdown and instead focuses on the benefits from the strategy to pivot to convenience retail. The latter is important given that it reduces earnings exposure to the volatile Refining segment.
Balance Sheet Flexibility
As at 31 December 2022, the balance sheet was in a net cash position of $291m. Following the OTR acquisition, the balance sheet swings from a net cash position to gearing (on a net debt to EBITDA basis) of 0.6x-0.8x. This is because the OTR acquisition was mostly funded from debt.
Importantly, as this level of gearing remains below the target gearing range of 1.0-1.5x. Accordingly, the Company still has scope to pursue further acquisitions. The latter are likely to be well received by the market. Based on the relative multiples paid for the recent Coles Express and OTR acquisitions, management have been disciplined in not overpaying for growth.
The improved rating in VEA’s multiple now sees the shares trading on a 1-year forward P/E multiple that is broadly in line with that for ASX-listed competitor Ampol (ASX:ALD). Looking beyond the refinery shutdown, VEA shares have the potential to trade at a premium to ALD. This is because the Coles Express and OTR acquisitions provides the Company with higher composition of convenience retail earnings by FY25 relative to ALD.
VEA is bouncing off a support level near $2.90 and we have also got a buy signal on the MACD. This makes current levels a buying opportunity. The only negative is that the moves up and down these past few months have been very sharp and the daily ranges have been quite large. Therefore, traders should consider an initial stop fairly close by – just under support near $2.90.
Michael Gable is managing director of Fairmont Equities.
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