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Caltex Australia Limited – Our pick for a Buy

October 07, 2015 | Team Kalkine
Caltex Australia Limited – Our pick for a Buy

Improved bottom line despite pressure:



Caltex Australia Limited (ASX: CTX) reported a net profit after tax of $375 million during the first half of 2015, which is an increase of 130% on a year over year basis, as the group derived over $29 million after tax with the sale of its surplus property in Western Australia. Lytton refinery’s EBIT surged by $114 million to $154 million during the period. Moreover, the company also witnessed crude and product inventory gains of $95 million after tax as compared to the crude and product inventory losses of $10 million after tax in the corresponding period of last year. Caltex Australia doubled its EBIT to $551 million in 1H15, against $275 million in the prior corresponding period. The group’s earnings per share improved to 139 cents during the period from 60 cents per share in 1H14. Management reported a fully franked interim dividend of 47 cents per share, which is on track with its dividend pay-out ratio range projection of 40% to 60%.
 
 
Q1 net profit after tax (Source: Company Reports)

Solid Vortex business partly offset the overall transport fuels volumes pressure:

Caltex Australia’s sales volume of transport fuels declined by 4.4% yoy to 7.7 billion liters during first half of 2015, impacted by the loss of a major diesel supply contract and tough market conditions. Total petrol volumes also plunged by 2.2% yoy to 3.0 billion liters, due to tough industry conditions. On the other hand, enhanced sales of premium grades from Vortex 95 and Vortex 98 had offset the falling demand for unleaded petrol to some extent. Meanwhile, the group’s diesel volumes also fell by 5.2% yoy to 3.5 billion liters, as the group lost a major supply contract. Moreover, decrease in spot volume marine diesel sales in Western Australia coupled with lower diesel requirements (as several LNG projects neared completion) led to further pressure. But, solid momentum of the premium Vortex diesel product across the group’s retail segment partly offset the overall pressure, and Vortex premium diesel contributed to over 30% of total diesel sales during the period. However, overall Jet volumes were under pressure during the period falling by 8% yoy against an increase of 11% during pcp.



Cost of sales operating profit (Source: company Reports)

Shifted to integrated transport fuels player to drive growth:

Caltex Australia shifted its business model in to pure transport fuels business to focus on its core business and enhance competitiveness. Accordingly, the group closed its Kurnell refinery in last year October and focused on cost savings leading to a better cash flows. Moreover, Caltex incurred over $20 million costs related to supply and marketing efforts which include shipping & demurrage supply costs to underpin Lytton Turnaround and Inspection program. Meanwhile, CTX decreased its net debt by 13% yoy to $715 million. The group also cut its capital expenditure to $170 million during first half of 2015 from $251 million in 1H14. Gearing ratio improved to 21% in 1H15 against 23% in pcp.

 
 
Total Shareholders Return Performance (Source: company Reports)
 

Caltex Refiner Margin Update:

The August unlagged CRM increased to US$18.29/bbl as compared to US$16.50/bbl in July and US$9.77/bbl in August 2014. The unlagged Weighted Average Margin at Caltex Singapore also rose to US$15.35/bbl during August (US$15.42/bbl in July) from US$12.92/bbl in pcp. Caltex witnessed a positive pricing lag of US$1.27/bbl in August 2015 against US$1.04/bbl in July 2015 and US$0.76/bb in August 2014 , as better petrol and diesel refiner margins during August last week partly offset the decreasing Brent prices. August 2015 realized CRM also rose to US$19.56/bbl from US$17.54/bbl in July and US$10.53/bbl in pcp. Meanwhile, Caltex improved its sales from production to 503ML in August as compared to 434ML in July, as Lytton as well as Kurnell refineries were operating.

 

Stock Performance:

Caltex Australia shares fell 7.1% year to date on the back of falling commodity prices and volumes pressure. On the other hand, Caltex Australia shares surged by 6.7% yoy in the last four weeks driven by its outstanding bottom line increase. Caltex intends to focus on its Ampol product sourcing, shipping capabilities as well as expand its supply chain infrastructure and retail network. Lytton supply agreement with BP would boost its volumes in the coming periods and the group continues to focus on Lytton operational efficiency. Caltex would continue its Tabula Rasa program of implementing cost and efficiency initiatives. We believe that Caltex is trading at attractive valuations and accordingly, give a “BUY” recommendation at the current price of $33.00.


CTX Daily Chart (Source: Thomson Reuters)

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