Company Overview: Viva Energy Group Ltd is an Australia-based integrated downstream petroleum company. The Company operates across three business segments: Retail, Fuels and Marketing; Refining; and Supply, Corporate and Overheads. Retail, Fuels and Marketing segment consists of retail and commercial operations. Retail, which supplies and markets fuel products and lubricants through a national network sites. Commercial, which supplies of fuel, lubricants and specialty products to commercial customers. Refining segment owns and operates the Geelong Refinery, in Victoria, which converts imported and locally sourced crude oil into petroleum products including gasoline, diesel, jet fuel, aviation gasoline, gas, solvents, bitumen and other specialty products. Supply, Corporate and Overheads segment owns contracted access to a national infrastructure network comprising terminals, retail sites, storage tanks, depots and pipelines positioned across metropolitan and regional Australia.
 

VEA Details

H1FY19 Underlying NPAT at $78 Mn came in at Upper Range of FY19 Guidance: Viva Energy Group Limited (ASX: VEA) is one of Australia’s leading energy companies and supplies around a quarter of the country’s liquid fuel requirements. It is the exclusive supplier of high-quality Shell fuels and lubricants in Australia through an extensive network of more than 1,260 service stations across the country. The company owns and operates the strategically located Geelong Refinery in Victoria, and operates bulk fuels, aviation, bitumen, marine, chemicals and lubricants businesses, which are supported by more than 20 terminals and 50 airports and airfields across the country. 

Revenue from sale of goods is recognized at the point in time when control of the asset is transferred to the customer, generally on delivery. The customer has full discretion over the channel and price to sell the products, and there is no unfulfilled obligation that could affect the customer’s acceptance of the products. Revenue is recognized, based on the price specified in the contract, net of expected returns, trade allowances, rebates and GST collected on behalf of third parties. Total revenue includes the recovery of excise paid.

The company enjoyed a decent operational performance during the first half of FY19 and executed a number of strategic initiatives that have positioned it well for the future. It’s sales volume in the first half of FY19 increased by ~2.5% on previous corresponding period. The Alliance agreement with Coles was successfully renegotiated. The implementation of a more competitive pricing strategy has successfully stabilised weekly sales volumes after a period of decline through this retail channel, and a range of marketing programs have been developed to reactivate lapsed customers.

Going forward, the company expects total sales volumes in the H2FY19 to remain in-line with sales volumes achieved in H1FY19. The company is determined to improve its margins in its segments, in order to deliver better value to its shareholders. 
 

VEA network distribution by state (Source: Company Reports)

H1FY19 Key Highlights for the period ended June 30, 2019: Total sales volume increased by ~2.5% to 7,126 Mn litres, as compared to previous corresponding period, mainly driven by growth in Liberty and other retail channels along with strong performance in the commercial business. Group’s Underlying EBITDA (Replacement cost (RC) basis) for the period was reported at $171.6 Mn, which was inclined towards the upper end of June 2019 guidance range of $150-$180 Mn. Underlying net profit after tax (NPAT) (RC) for the period was reported at $78.0 Mn, which was at the upper end of June 2019 guidance range of $60 – $80 Mn. The debt included a $137.0 Mn one-off payment to the Alliance partner Coles Express. The transition of retail fuel pricing from Coles Express to Viva Energy was successfully completed, effective March 1, 2019.

During the period, refining operational availability stood at 94% and refining intake stood at 21.4 mbbls (million barrels), which is an increase of 12% on the previous corresponding period. Record diesel production for the period stood at 40% of the total production.

The Board of Directors declared an interim 2019 dividend of 2.1 cents (fully franked), representing a payout ratio of 60% of distributable NPAT (RC). The record date and payment date were on September 27, 2019 and October 14, 2019, respectively.
 

H1FY19 Income Statement (Source: Company Reports)

Segment Wise Performance:

In the Retail segment, Underlying EBITDA (RC) for H1FY19 was reported at $283.3 Mn for, which was within the guidance range of $275-290 Mn. The Company, along with its Alliance partner Coles Express has begun investment in more competitive pump pricing across the country while focusing on a range of new marketing initiatives.

In the Commercial segment, Underlying EBITDA (RC) for H1FY19 was reported at $155.6 Mn, excluding the impact of AASB 16. However, with the adoption of AASB 16, Commercial Underlying EBITDA (RC) was reported at $158.3 Mn, an increase of $2.7 Mn, mainly due to the removal of lease expenses. During the period, the company renegotiated and extended several customer contracts successfully, along with new contracts to secure for future growth.

Excluding the impact of AASB 16, Supply, Corporate & Overheads segment reported Underlying EBITDA (RC) at -$285.7 Mn in 1HFY19, which is in-line with the guidance provided in June 2019. With the adoption of AASB 16, reclassification of operating lease expense at $123.1 Mn, to interest expense resulted in an improvement of Underlying EBITDA (RC) at -$162.6 Mn.

In the Refining segment, Underlying EBITDA (RC) for the period was reported at the upper end of the revised guidance provided in June 2019, at $18.4 Mn. Geelong Refining margins (GFR) declined to an average of US$5.1/bbl in H1FY19 against an average of US$7.4/bbl in FY2018. Continued weakness in regional refining margins, in particular, gasoline cracks, was the primary driver of the lower margins achieved at Geelong.


Geelong Refinery Output Production Split (Source: Company Reports)

Recent Updates:
On October 10, 2019, the Australian Competition & Consumer Commission (ACCC) informed the market that it will not oppose the proposed acquisition by Viva Energy Australia Pty Ltd, a wholly owned entity of Viva Energy Group Limited in Liberty Oil Holdings Pty Ltd’s wholesale business (50% interest). The commission found that the proposed acquisition is unlikely to undermine competition in the wholesale supply of fuel products, as retailers have the option to switch to alternative wholesale suppliers and alternative brands, which could constrain Viva’s wholesale prices and supply terms.

On September 19, 2019, S&P Global Ratings affirmed company’s long-term issuer credit rating at 'BBB-' and revised the outlook from stable to negative because of challenging industry conditions. The company informed the market that its debt terms are not contingent on a particular credit rating, and the revised outlook will not impact the Company’s borrowing terms. It has a net debt position of $168.7 Mn as on June 30, 2019, with no long-term structural debt.
 

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 69.41% of the total shareholding. Viva Energy B.V. and Perpetual Investment Management Limited hold maximum interests in the company at 44.84% and 5.22%, respectively.


Top 10 Shareholders (Source: Thomson Reuters)

A Quick Look at Key Metrics: Its gross margin and EBITDA margin improved from 8.1% and 2.9% in H1FY18 to 9.0% and 3.8% in H1FY19, respectively. Its quick ratio for H1FY19 stood at 1x, better than the industry median of 0.82x, indicating a better liquidity position for the company.


Key Metrics (Source: Thomson Reuters)

Key Risks: The company is susceptible to certain risks such as operational and supply chain risks, compliance and regulatory risk, risk associated with commodity price exposure, health, safety & environmental risks, climate change, liquidity and financing risk, exchange rate risk, credit risk, material decline in demand for the company’s products, risk associated with labor costs and industrial disputes, etc. 
 
What to expect: As per the release, total sales volumes in the second half of FY19 is expected to remain broadly in-line with the sales volumes achieved in the first half of FY19. In Retail segment, the company remains committed to meet its medium-term target of increasing sales volumes through the Alliance channel to 70 Mn liters per week and then 75 Mn liters per week. Due to heightened competition, oil price volatility and a lower Australian dollar, retail fuel margins remain lower than average during the early part of second half of FY19. If retail margin weakness persists in the second half, Retail earnings are likely to remain same as the Underlying EBITDA (RC) result achieved in the first half of FY19.

In the commercial segment, market is expected to remain extremely competitive, however, the company is determined on improving margin performance through cost and supply chain efficiencies.

In the refining segment, the expected Geelong Refining Margin (GRM) and refining intake for the September’19 Quarter will be impacted by the planned maintenance of the Platformer in August 2019. Moreover, the change in financial performance of the Geelong Refinery over movements in GRM and foreign exchange can be gauged from the table below.


Variation in Financial Performance of Geelong Refinery (Source: Company Reports)


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Approach:

EV/EBITDA Multiple Approach (Source: Thomson Reuters), *NTM-Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation: VEA’s stock generated a YTD return of 6.88%, while in the span of one year, it has generated a negative return of 12.85%. The company's underlying EBITDA (RC) for the H1FY19 was at the upper range of stated guidance. Its sales volume for the first half of FY19 improved over the previous corresponding period. Its partnership with Coles Express is expected to help the company to get new contracts and improvement in earnings. Currently, the stock is trading below the average of 52-week high and low levels of $2.580 and $1.660, respectively. Based on the foregoing, we have valued the stock using a relative valuation method, i.e., EV/EBITDA multiple, and arrived at a target price of lower double-digit growth (in % term). Hence, we give a “Buy” recommendation on the stock at the current market price of A$1.910, up 2.413% as on 16 October 2019.
 

VEA Daily Technical Chart (Source: Thomson Reuters)

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