Reliable Lytton operational performance enables higher refiner margins; Supply & marketing growth continues: Caltex Australia Limited (ASX: CTX) engages in purchasing, refining, distributing and marketing of its petroleum products in Australia and Singapore. Caltex delivers high-quality fuels, lubricants, services and convenience offerings to its diverse range of customers through robust Australian network of retail sites, depots and distribution centres. The company has recorded profit after tax (NPAT) growth of 1.5% year on year (YoY) to $619 Mn in FY17 against $610 Mn in FY16, on a historic cost operating profit basis. The full year financial performance includes crude and product inventory gains of $12 Mn after tax as compared to crude and product inventory gains of $86 Mn in last year.

On Business segment front, Supply and Marketing registered EBIT of $733 Mn in FY17.This was impacted due to unfavourable externalities of $43 Mn that occurred during the same period. Total Australian transport fuel volumes increased 3.4% to 16.2 BL with commercial B2B volumes increasing 7.5% to 7.6 BL. Retail transport fuel volume were flat at 8.6 BL as compared to previous year. By product, total diesel volumes increased 7.3% to 7.7 BL, while total petrol decreased 2.8% to 5.7BL, which is broadly in line with industry trend. Commercial diesel volumes grew by 9.2% to 4.4BL due to retention of core B2B clients, increased resources and commercial activities. Jet volume increased 6.2% to 2.8BL, reflecting strong market activity particularly across the East Coast and Caltex securing increased volumes from new and growing carriers. Lytton refinery delivered an EBIT of $308 Mn in 2017, up 50% YoY. The group’s corporate cost came at $106 Mn during 31 December 2017, up by $5Mn as compared to the prior year. Nonetheless, the Board declared a fully franked final dividend of 61 cents per ordinary share and this is expected to be paid on 6 April 2018.

Over the last five years, Caltex Australia has been actively engaged in transforming itself from a refiner-marketer through to a leading integrated transport fuels player. The group has also made good progress with its convenience retail program and had undertaken a review of its operating model that helped identify an initial $60 million as annual cost saving. Further, the company has decided to change from its historical position of five-year whole refinery Turnaround & Inspection (T&I) maintenance from 2018 onward.

On the other hand, Caltex intends to spend about $120 million for taking charge of the remaining franchise sites in its network and is working on spinning-off of infrastructure in the continuing overhaul of the group. CTX has primarily ended the two-year review of the franchise model, and as an outcome, CTX will take control of the core business to achieve its retail growth ambitions.

Based on high dependency on external factors such as stiff competition, Fx-fluctuation and pressure on refiner margins coupled with last one-year stock performance which has risen around 28.74% as on 27 February 2018 followed by a drop of 3% on February 28, 2018, we give an “Expensive” recommendation on the stock at the current price of $35.17
 

Replacement Cost Operating Profit EBIT by Segment (Source: Company Report)

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