Caltex Australia Ltd (ASX: CTX)



CTX Details

In 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.

Decent refiner margin update: Caltex Australia had reported for August unlagged Caltex Refiner Margin (CRM) of US$15.41/bbl, and this has been slightly better than the prior month figure (July 2017: US$15.20/bbl) and prior year monthly comparative figure (US$8.77/bbl). The August 2017 realised CRM of US$14.99/bbl was also above the July 2017 CRM of US$14.67/bbl and prior year comparative CRM of US$8.08/bbl in August 2016. Further, August unlagged Caltex Singapore Weighted Average Margin was US$14.08/bbl, which is also above both the prior month (July 2017: US$12.91/bbl) and prior year figures (August 2016: US$8.42/bbl). On the other hand, higher brent crude oil prices in the second half of August led to an unfavourable pricing lag. Further, the sales from production in August 2017 were above the prior month, however, below the prior year comparative period.

Rise in debt levels: Caltex’s financial results for the six months ending 30 June 2017, reflected growth in underlying supply and marketing earnings, an uplift in refiner margin and a 21% rise in Replacement Cost Operating Profit (RCOP) of $307 million over the previous corresponding period. However, historic cost profit accounted for crude and product inventory losses of $44 million after tax, compared with crude and product inventory gains of $64 million after tax in 1H 2016. The group’s headline Supply & Marketing EBIT was up 8% to $377 million while underlying EBIT was up 6% to $381 million (excluding externalities). Further, strong first half refiner margins led to a strong 62% growth in Lytton Refinery EBIT of $149 million over 1H 2016. Given the result, CTX also increased its interim dividend by 20% to 60.0 cents per share. On the other hand, tax payments and Milemaker acquisition led to the rise in group’s net debt at 30 June 2017 to be of $730 million against $454 million at 31 December 2016 and $693 million at 30 June 2016.

Earnings impact from loss of contract with Woolworths: The recent sale of Woolworth’s fuel business to BP (which is subject to regulatory approval) seem to have created a gap in CTX’s earnings profile as the areas of direct earnings exposure include loss of wholesale marketing margins on the net volume loss, impact on Ampol sourcing benefits, and fixed cost recovery. In response to the expected lost Woolworths volumes / earnings, Caltex is now emphasising on delivering shareholder returns by executing its strategy in a capital efficient manner.



Strategy Update (Source: Company Reports)
 
In last one year, the stock has fallen about 8.4%, as at October 05, 2017. Given that the group’s efforts on revival strategies might take time while challenges prevail in retail business, we give a “Sell” recommendation on the stock at the current price of $32.03
 

CTX Daily Chart (Source: Thomson Reuters)

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