Caltex Australia Limited

Revised Takeover-Proposal Received from ACT: Caltex Australia Limited (ASX: CTX) is one of the leading transport fuel suppliers, with a network of approximately 2,000 company-owned or affiliated sites. The company operates as a refiner, importer and marketer of fuels and lubricants. On 26 November 2019, CTX confirmed that it has received an unsolicited, conditional, confidential, non-binding and indicative proposal from Alimentation Couche-Tard Inc. (ACT) to acquire all of the shares in Caltex by a scheme of arrangement at an indicative cash price of A$34.50 cash per share less any dividends declared by CTX. ACT earlier had proposed an indicative cash price of A$32.00 per share for the same, which was rejected by CTX. Recently, the company also notified that it will provide an update on the execution of its strategy, including the roll-out of the Metro@Caltex stores and Fuels & Infrastructure initiatives at its Investor Day.

Q3 2019 Highlights for the Period Ended 30 September 2019: CTX declared its three months’ operational highlights wherein, the company reported that Caltex Refiner Margin (CRM) stood at US$10.53/bbl, higher than Q2 2019 margin of US$7.45/bbl but lower than Q3 2018 margin of US$12.17bbl. Sales from production during the quarter stood at 1,055 ML, lower than both Q2 2019 and Q3 2018 sales of 1,373ML and 1,410ML, respectively, on account of planned turnaround and inspection (T&I) programs during July and August 2019.

For the nine months ended 30 September 2019, CTX posted average CRM at US$8.31/bbl as compared to US$10.71/bbl in prior corresponding period.  CRM sales from production at the end of the period stood at 3,915 ML as compared to 4,566 ML in pcp.


Caltex Refiner Margin Update (Source: Company Reports)

Caltex Singapore reported weighted average margin for Q3 2019 at US$12.86/bbl, which was above 1H 2019 Singapore weighted average margin of US$9.10/bbl. The increase in margin was driven by improved refiner margins across its products primarily with gasoline, that strengthened between 1H 2019 and Q3 2019. As per the company, the business was impacted by a rise in crude oil premiums as a result of increased sweet crude demand and higher margins. Landed crude premium during H1FY19 stood at US$5.50/bbl. In Q3 2019, CTX reported an increase of US$0.83/bbl in the premium in comparison to 1H 2019.

Guidance: On account of an improvement in fuel margin, CTX expects Convenience Retail EBIT to be in the range of $190 million to $210 million, depicting an increase of $20 million to $40 million from 1H 2019. Total CR fuels sales volumes are expected to be ~4.8 billion litres in 2019. Although CTX earnings are co-related to changes in CRM, the company could not provide an estimate for the same due to uncertainty posed by external market conditions. This uncertainty is exacerbated for 2020 given the short-term impacts from the introduction of the IMO2020 fuel specifications, and means that there is a possibility that CRM could sit outside the range of potential outcomes.
Stock Recommendation: The stock of CTX is trading at $33.790, with a market capitalization of ~$7.44 billion. The stock is quoting at the upper band of its 52-week trading range of $20.520-$34.230.The stock has given returns of 7.58% and 15.24% in the last one-month and three-months, respectively. Considering the revised proposal from ACT, price movements and current trading levels, we recommend an ‘Expensive’ rating on the stock at the current market price of $33.790, up 13.427% on account of the revised proposal from ACT as on 26 November 2019.

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