Viva Energy Group: Great shape heading into recovery

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
26 October 2021, 9:00 AM
Sectors Covered:
Mining, Energy

  • Overall a marginally softer 3Q21 than we expected, but Viva Energy Australia (ASX:VEA) remains in a strong position leveraged to the NSW and VIC reopenings.
  • Retail volumes and margins trailed our estimates slightly, while commercial was inline and refining was mixed.
  • With NSW and VIC both coming out of lockdown, we expect a strong 4Q21 with retail volumes rising as 55% of our population resumes more typical travel.
  • We see VEA in a strong position as NSW/VIC lockdowns fall and retail fuel volumes get set to recover through 4Q21.
  • We maintain our Add recommendation with a (login to view) target price.

Event

Viva Energy Australia (ASX:VEA) reported its 3Q21 operational and trading report, showing a slightly softer 3Q21 than we expected, but on balance immaterial to our investment view.

Retail fuel volumes in 3Q21 of 946ML +5.1% pcp (vs MorgE 1,011ML), saw a larger impact from NSW/VIC lockdowns than we estimated. Alliance volumes of 52.2ml/w (million litres per week), were +7.8% pcp but -20% vs the 1H21 average. We continue to see a stronger performance from VEA’s Liberty network and non-Alliance channels.

Commercial remains strong, with solid 3Q21 fuel volumes inline at 2,105ML (vs MorgE 2,092ML) +11% pcp.

VEA’s refining performance in 3Q21 was mixed. Higher intake at 9.5mmbbl (vs MorgE 9.0mmbbl) despite maintenance activity, while GRM (gross refining margins) before government support payments fell short of our estimate at US$5.5/bbl (vs MorgE US$5.9/bbl).

While we had expected elevated energy costs, 3Q21 also saw high transport costs (as lockdowns increased distances VEA product had to travel to find a market).

Analysis

Putting 3Q21 in context, the difference vs our assumptions are immaterial to our investment view. Post changes and model roll forward our blended (DCF:EBITDA) target price has been revised to (login to view).

We see VEA now entering a strong phase of:

  1. retail fuel volumes recovering to levels above pre-COVID-19 levels while margins hold at healthy levels,
  2. refining earnings benefit from domestic/regional demand recovery and startup of the government support program (also reducing volatility); and
  3. commercial remains stable with net incremental gains from recovering aviation and marine demand.

Forecast and valuation update

We have made mark-to-market adjustments to our forecasts post the operational and trading update.

Investment view 

While its share price has performed strongly over the last 12 months, we maintain our Add rating on VEA.

We see market and earnings conditions firming under VEA, which we expect will see the market re-rate VEA to at least 7.0x EBITDA, with upside risk to EBITDA forecasts if VEA outperforms on retail volumes or margins.

Price catalysts

Investor Day 24 November.

4Q21 operational result and fuel market trends.

Risks

Key risk to our Add call is the potential for further COVID-19 impacts to demand conditions across Australia.

Competitive pressures in retail.

Oil/FX price risk to costs.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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