Caltex Australia has batted away criticism from analysts and shareholders that its strategy to take back control of its franchised stores and boost retail and convenience earnings is “going backwards”.
The sharp criticism of the company’s retail strategy execution came despite the group on Wednesday announcing a $260 million share buyback as it beat its profit guidance and declared it was on track to return more than 400 franchised stores to company ownership by 2020.
The fuel supplier and retailer said the fully franked off-market share buyback, at a price to be determined by a tender process, was expected to be completed in the second quarter of 2019.
Caltex’s forecast retail performance came under fire from Bank of America Merril Lynch retail analyst David Errington, who asked why the group’s convenience business was going backwards.
He also queried why the executive general manager of the business, Richard Pearson, was leaving after only a year in the role. Mr Pearson will be replaced by Joanne Taylor, whose background is in human resources.
Caltex chief executive Julian Segal described various changes to the senior leadership team as “fine tuning”, while Mr Errington called it a major restructure.
Mr Errington also disputed comments by outgoing Caltex chief financial officer Simon Hepworth, who will retire later this year, that the company remained on track.
“I can’t see how you’re getting uplift when you’re going backwards by $35 million a year. None of you guys will be around to be accountable for it,” Mr Errington said.
Mr Hepworth rejected this saying: “The underlying business is still on track to deliver growth in 2019 and then ultimately over the next three to four years.”
A Caltex spokesman added the profit from convenience retail of $307 million was above the guidance range of $295-305 million but was 8 per cent lower than the prior year.
“We are less than two years into the execution of our retail strategy,” he said.
Contact Asset Management portfolio manager Tom Millner, who manages shareholder BKI Investments, said Mr Errington’s comments had some merit.
“Everyone is fed up with the speed it is being delivered,” he said.
“But the retail performance is a reflection of the wider global retail markets, it’s pretty hard right now.”
Everyone is fed up with the speed it is being delivered. – Contact Asset Management’s Tom Millner
However, he added that the company’s capital expenditure had been otherwise well managed, and the results were positive, apart from lower refining margins.
Caltex spent about $20 million in 2018 bringing 182 franchised petrol stations back into the fold under its previously announced plan to exit the franchise industry. It had 516 Caltex-controlled service stations at December 31.
It expects to spend between $20 million and $35 million annually to buy back control of the remaining petrol stations.
Caltex said the transition of franchise stores and a one-off $35 million hit following the renegotiation of its fuel supply contract to Woolworths’ petrol stations hit convenience retail earnings before interest and tax (EBIT).
Fuel & infrastructure’s EBIT of $570 million was affected by outages in the third quarter at Queensland’s Lytton refinery and a lower refining margin, but was in line with guidance.
Overall annual profit fell 10 per cent to $560 million, from $619 million in 2017, but was still just above its guidance range of $530 million to $550 million.
“In 2018, we made significant progress executing the fuels and infrastructure and convenience retail strategies, setting the company up for long-term success,” Mr Segal said.
“We are on track for control of our network by the end of 2020.”
Caltex chairman Steve Gregg said the buyback would help boost the company’s share price.
“While attractive growth opportunities exist in the portfolio, Caltex believes the buyback will benefit all of our shareholders, given it is expected to improve Caltex’s earnings per share and return on equity,” Mr Gregg said.
Caltex is issuing a flat final, fully franked dividend of 61¢ a share, payable on April 5. Caltex shares rose 4.7 per cent by close of Tuesday trading to hit $28.90
“The dividend was good, and as they’ve still got franking credits of $2 per share on the balance sheet – we could see a special dividend in the medium term,” Mr Millner said.
Extracted from The Sydney Morning Herald