Caltex investors are losing confidence in a forecast revival of fortunes at the fuels supplier after advice that retailing profits will roughly halve this June half year, while the refinery will barely break even.
The warning that benchmark net profit would dive as much as 59 per cent in the six months to June sent Caltex’s share price into a tailspin, sinking 24 per cent in early trading, the most since June 1988.
All parts of the business have been hit, surprising some investors with just how difficult trading has been in the retail division after hopes were fuelled only in April of a recovery. The weakness in refining has been well known, with margins across Asia reaching five-year lows early this year, while an unexpected outage at Caltex’s Lytton plant near Brisbane also took a toll.
“What caught people offguard was the longevity of the weakness in the retailing business,” said Jason Teh, a portfolio manager at Vertium Asset Management.
“A downgrade is a downgrade: there’s no hiding that.”
Profit on a replacement cost basis would drop to $120 million-$140 million, down from $296 million posted in the first half of 2018, Caltex advised on Thursday, citing unaudited figures.
That compares with a market consensus of just over $200 million, according to sources. Caltex is due to report its first-half profit in August.
Hayberry Global Funds investment analyst Matthew Blumberg said that while the first quarter was weak for Caltex, commentary around the operating environment in April had aroused optimism for the rest of the year. But now it seems the environment has again deteriorated.
“The disappointment in the first half will make investors more sceptical on any second half optimism, which will need to be clearly explained by management,” Mr Blumberg said. “Management could illustrate their belief in the underlying value of the business through more aggressive share buybacks.”
Before interest and tax, first-half earnings are set to miss consensus by about 40 per cent, according to Macquarie Equities, which told investors its “outperform” recommendation on the stock was “under review”.
Caltex shares recovered some of their earlier losses in afternoon trading after management held a conference call with investors, but still closed down 13.3 per cent at $23.40. Earlier the stock hit $20.52 earlier, the lowest since February 2014.
Shares in listed rival Viva Energy shed 8 per cent to $2.06.
“We didn’t realise just how tough it was in the retail space,” said Romano Sala Tenna at Katana Asset Management, which was an early investor in Viva before exiting in March amid concern about the weakness in refining. “Things haven’t improved since then.”
Still, some investors took heart from Caltex management’s advice that most of the weakness in the first half is “cyclical”, rather than indicative of a “structural” shift in the fuel market. Citi’s sales desk noted that $35 million-$40 million of the impact at the Lytton refinery in Brisbane was a one-off that is subject to an insurance claim, while the convenience retailing business has just in the past week started to benefit from the fall in crude oil prices in May.
Earnings before interest and tax at the Lytton refinery in Brisbane will be between zero and $10 million, down from $105 million, Caltex said, confirming the weakness in refining profits that has been plaguing the sector since last year. The plant suffered an unexpected outage in the March quarter.
Chief executive Julian Segal insisted Caltex had “delivered a fair underlying performance in a very challenging market”.
“The industry continues to experience difficult macro-economic conditions arising from the slowing Australian economy, low refining margins and high crude prices combined with a low FX [foreign exchange] rate,” he said.
The difficult external environment adds to investors’ worries about Caltex’s convenience retailing revamp, where some have questioned whether a targeted earnings uplift is achievable.
Earnings before interest and tax from Caltex’s convenience retail business will slump to $75 million-$85 million this half, down from $161 million a year earlier, the company said.
“Caltex is so far not delivering on its next growth strategy with retail convenience earnings halving from a year ago,” said Alan Kwan, senior portfolio manager at Alleron Investment Management.
He noted that the quality of Caltex’s balance sheet “continues to deteriorate”, with debt rising by $200 million to $1.2 billion.
Caltex already warned in March of tough conditions in fuel retailing, due to both the impact of a sharp rise in crude oil prices, and intense competition.
Macquarie analyst Andrew Hodge noted that increased competition was a key risk the bank had highlighted after Viva said it was looking to regain lost market under the revamped Coles alliance.
Macquarie noted that EBIT in Caltex’s convenience retailing business would be about 50 per cent lower than a year earlier as fuel margins tightened and retail diesel market conditions “remain challenged”. It pointed to data that shows diesel margins have dropped from about 15¢ per litre in the second half of 2018 to about 10¢ per litre this June half.
“The one positive here was that shop margins are expected to be broadly in line,” Macquarie said.
EBIT from the fuels and infrastructure business, which includes refining, would be between $190 million and $210 million, down from $314 million. But when the refinery is excluded, earnings were only slightly lower and would have improved were it not for about a $40 million hit from the revised fuel supply contract with Woolworths.
The refining margin for Lytton in the first five months of the year was $US8.22 a barrel, down from $US10.06 a barrel in the first half of 2018. Caltex assumes the margin will slide again in June, to $US5.20.
Extracted from AFR