There is a clear and apparently widening mismatch in how Caltex chief executive Julian Segal and his team see the remaking of the fuel giant, and how the market sees it.
Its unaudited profit guidance for calendar 2018 provided another jolt for investors on Tuesday, sending Caltex’s shares down 6.5 per cent to a fresh 52-week low, and the stock’s lowest mark since August 2014.
Caltex’s market value has now fallen by more than 30 per cent since the stock’s recent peak in February, cutting its market value by $2.9 billion to $6.6 billion.
Since the company’s investor day in late October, the market had been bracing for a tough end to the year, but this was softer than first thought.
Caltex said on Tuesday it was on track to report a replacement cost operating profit (the company’s preferred measure) of between $530 million and $553 million, which at the mid point is down about 15 per cent on last year, although at the upper end it would be in line with consensus of $552 million.
The company’s historical cost profit after tax will come in between $530 million and $550 million, compared with the $619 million result posted last year. Morgan Stanley analyst Adam Martin had expected an HCOP net profit of $625 million.
Segal’s argument is that 2018 has been a year in which Caltex has set up its fuels and infrastructure business and its convenience retail division for the future.
Sales volume
In the former, the acquisition of fuel marketing and distribution business Seaoil in the Philippines, and the impact of a full year’s earnings contribution from Gull New Zealand, boosted international fuel sales volume by 34 per cent, and helped increase the fuels and infrastructure division’s earnings by 21 per cent to between $405 million and $415 million.
But this excludes the performance of the company’s Lytton refinery, where an unplanned outage in the third quarter and a lower regional refining margin resulted in earnings falling by 51 per cent to between $155 million and $165 million.
It’s the convenience business that has investors nervous, though.
It will deliver earnings before interest and tax of between $295 million and $305 million, which while higher than the guidance provided in late October, is about 10 per cent lower than the previous year.
Higher oil prices and the transition from Caltex’s previous franchise model to a company-owned one have weighed on earnings.
Segal is in the middle of a major rejuvenation of the Caltex convenience offering, chasing the big prize of raising Australia’s convenience fuel spending rates to those of Britain and Japan, which are about six times higher.
It’s a nut that several groups, including the ASX’s other listed fuel player, Viva Energy, have tried or are trying to crack.
Key weapons
Caltex’s key weapons are the rollout of its Foodary food and beverage concept – the 55th outlet was completed in December – and the expansion of its recently re-signed Woolworths partnership, under which the Woolworths “Rewards” loyalty program will be rolled out across the Caltex network, and the grocery giant’s fuel redemption offer made available at another 125 Caltex sites.
But the convenience push will be a long and potentially difficult haul, as Tuesday’s announcement showed.
Caltex will take a $19 million after tax loss on the sale of its 49 per cent interest in Kitchen FoodCo, a business Caltex invested in to develop a fresh food supply offer to its network. But now the group “believes that it can accelerate the delivery of its fresh food offer by working with a broader range of suppliers, including Woolworths through its previously announced convenience retail partnership”.
That’s a pretty expensive change of strategy, even though Caltex will partly offset this $19 million with a $7 million write-back on the franchise employment assistance fund it established last year, and apparently hasn’t been drawn on as heavily as previously expected.
Still, investors could be forgiven for seeing the Kitchen FoodCo loss as symbolic of the struggles that Caltex has faced – and could yet face – as it tries to get this convenience business right.
Extracted from AFR