• Christopher Hall

Is Caltex a Buy after the Take-Over Failed?


Caltex’s Canadian suitor ACT announced that they have decided not to proceed with an A$8.8 billion takeover bid due to economic uncertainties posed by the COVID-19 pandemic.

Hugh Dive from Atlas Funds Management looks at whether CTX Is now a buy as hedge funds trading the merger arbitrage flee the register and whether Caltex is now good value to buy.

[00:00:17] Now in a very interesting one. And let's bring Lister's up to speed on Monday. This week, Caltex's Canadian Souta A.C.T. announced that they have decided not to proceed with the 8.8 billion dollar takeover due to economic uncertainties posed by the coronavirus pandemic. Fair enough. Now to Todd said in a statement that it may reengage with these giant convenience store, petrol station, refinery company once there is sufficient clarity on the global outlook. This was to be expected given the significant changes in the economy since A.C.T. increased their bid for the third time on the 13th of February. Now for Texas management, it's back to work, which at their last investment briefing seemed as though the management team had one foot out the door. Based on the mergers, foregone conclusion now will apply here. The Standard Toolkit a Tuesday metrics to see if the 60s apply at the moment. But first off, Hugh, can you tell us where celtics' came from to get onto the ASX? [00:01:26][69.4]

[00:01:28] Right. Good morning, Chris. So celtics' began life as the oil importer Ample, which sells some of their older listeners. Remember that was first listed on the ASX in 1948. So during the 50s and 60s, the company ample sort of vertically integrated their activities along the petroleum value chain by building refineries and building a network of service stations to sell. So in 1995, AMP all merged with the Australian operations of the big U.S. rival Caltex Chevron to become Caltex Australia with the Americans Chevron only sent in 2015. Chevron divested its 50 per cent stake in Caltex in what looks like a bad move. [00:02:12][44.3]

[00:02:14] So that 2015 is at around about the time when the Catholic share price peaked. [00:02:18][4.4]

[00:02:19] Yeah, there was a very good time, but that was probably it had a lot to do with some overall things. And Chevron now pulling back from minority minority stakes globaly. This was not this was another sort of not an isolated incident. It was like those things are very good. Margins were excellent, ran that times. So, yes, there was probably a higher end, about thirty six. But so it looks pretty good right now. But it was more a comment on what Chevron were doing globaly, just wanting to fully own things on our own. That's not having half think that wasn't it. [00:02:51][32.0]

[00:02:51] The boys got shafted. It was since the Chevron House decision and that's it. [00:02:56][4.2]

[00:02:56] Yeah. There was a range of other things out there making similar motors around the globe. [00:03:00][4.1]

[00:03:01] Neil, you've got volatility coming into this, so that's what happened to the oil prices that we've seen last night. [00:03:08][6.8]

[00:03:09] Yeah. Texas history. Yeah. [00:03:12][2.8]

[00:03:12] So, I mean, what's what they've been trying to do is reduce earnings volatility from refining, which can move around quite a lot and focus its the company on retailing. So Celtics converted their refinery, Kurnell in Sydney into an import Turnell and then a sort of trying to change the company by getting into joint venture agreements with Woolworths to roll out sort of co-branded service stations with small convenience supermarkets attached. [00:03:39][26.6]

[00:03:40] And when did all of this transition start? [00:03:42][2.4]

[00:03:43] I guess so. That remains 2013 onwards. It's been a bit of a gradual process. So celtics' mean transforming from a refinery or retailer to basically as it is, or if you're retailing your margins a bit more sort of stable and also sort of a bit higher and also a bit a reckoning recognizing that their old refineries built in the 1960s can't really compete with the new giant Asian oil refineries that are out of out of Singapore just by 50 year old kid. [00:04:14][31.0]

[00:04:14] And this is not release. They're competing in terms of efficiency with a relatively brand used a million liter per annum refineries. [00:04:22][7.6]

[00:04:23] So the old classic Mustang can't keep up with the McLaren supercar in terms of. [00:04:27][4.3]

[00:04:28] Yeah, and it would make no sense to build an enormous refinery in Australia just because we just don't have the volumes. It's much easier to buy those refined petrol from Singapore, the big new refineries then actually try to compete by updating your sort of 50 or 60 year old refineries in Queensland and Sydney trying to pay also local councils. I wouldn't be too delighted with that. Just a massive expired inspection and refining capacity. [00:04:55][27.5]

[00:04:56] A lot of headwinds there and it seems like the imminent shift in the company. Yeah, the business model comes down to how does it make money for shareholders? [00:05:03][6.3]

[00:05:04] What sort of Catholics in France? They have three business lines. So fueling is the structure, which is about 44 per percent of profit, which is ah and then add refining at the Libyan refinery in Brisbane, which is about 18, 20 per cent. That's their sole remaining refinery in Australia. And then the convenience, which is about 38 per cent of their profits to hence the fuels and infrastructure and about 44 percent of their profit. That part of the business also fueling infrastructure. That's a wholesale fuel operation that imports sort of various grades of petrol from Glasgow refiners money out of Singapore and then sells that product either to service stations, water commercial users such as airlines or mining companies. So in 2009 10, chiller infrastructure sold twenty one point one billion liters. [00:05:50][46.0]

[00:05:51] And here the value add is by blending, storing repass and products. But this can be sort of quite volatile zipless of you buying biota and try to sell lots of modules can there can be sort of built lags and delays. [00:06:06][14.4]

[00:06:07] You know, obviously that fuel comes from somewhere. You've mentioned it's come from Singapore, but there is still the lithium refinery. Yep. How do those operations with that refinery conduct? [00:06:17][9.8]

[00:06:18] So the little refineries in Brisbane and that's run by attempts at a profit and here sort of celtics' buyers that are crude oil, not finished product on the global markets and refined into the petroleum products. So they're finding there's refining that can also be quite volatile with earnings based on a Singapore refining margin, effectively your price of the import parity pricing. This is sort of a low margin and quite volatile business, but it gives Caltex the option of buy versus a manufacturer. So it's it's a bit of an option there. [00:06:47][28.6]

[00:06:48] And also the third component, what does the service station, how does that sort of your business and that look like? [00:06:55][7.4]

[00:06:56] Well, let's put it in that most easy thing to sort of understand as a network of about 650 service stations around Australia under the Celtics star MARD and the Celtics Woolworth's metro brand that has about 25 per cent share in the Australian fuel retailing celtics' also supply fuel to around about 11000, a thousand at 1100 other service stations around Australia, not Caltex brands here. That's really Calix. A strategy which has been very evolving has been to bring the ownership of stores in-house. So there was a more interested to invest in them. I suppose within their franchisees. And that gives the company greater control and to improve the presentation, the quality, the stores such as they've been rolling out the FRUITERER concept which you might be aware of, and also the Woolworths metro. This is likely to deliver sort of higher and more sustainable profit margins as people are buying so packaged meals and groceries with their with their fuel. [00:07:52][56.2]

[00:07:54] You know, we acquire the quality filter model, which is top rated Tuesday model known for at a fund management take from their analysis. They have a price they take for their analysis five key components. We start with financial leverage. Now, thanks to others in this group, how do they make. [00:08:11][17.3]

[00:08:12] So here Callis was quite well. So Geering is very low at a Lemba cent where they just cover eight times. [00:08:19][6.8]

[00:08:20] That's much lower than its direct better David Energy. It's much more celtics' is a much more conservative company. Veber Energies come out of private private equity. So what I see is much more interesting and sort of gearing that up to dress up that the balance sheet. Make it look better. So I'm a CALIX managers, they're living in a conservative fashion. And additionally, the companies for close to a billion dollars in franking credits on their balance sheet. [00:08:47][27.2]

[00:08:47] So financial leverage that they score quite well in the rate of expansion that we've seen from this kind of thing. [00:08:53][6.3]

[00:08:54] And you're right that so similar scores quite well. So revenue and asset growth has been growing quite Gramsci during relatively well, which is not bad enough in a market which is sort of being relatively sort of static. So the reasons for that, why celtics' have branded better than their sort of main competitors, is that in 19 in 2016, Celtics was expected to lose the Woolworths petrol supply agreement because Woolworths were looking to sell all their petrol stations to rival fuel supplier baby. So Caltex, we're looking at where a potential earnings hole about 10 TRE'DAVIOUS in their earnings from Wentworth's selling fuel to Woolworths. So cowardly responses celtics' and spend it into the new New Zealand goll and bought some other fuel resellers to replace the lost earnings power. They're quite fortunate. [00:09:43][49.5]

[00:09:44] In 2018, Caltex at the A-Triple-C not back b.p.'s bid for Woolworths service stations due to market control issues, and that resulted in celtics' sort of thinking a new fifteen year supply agreement with Woolworths, which was quite it was was quite surprising, quite good for shareholders. [00:10:02][18.1]

[00:10:03] So they maintain the Woolworths agreement for 15 years and because of the possibility of losing it, they went out to market and expanded in New Zealand buying gold. [00:10:13][9.9]

[00:10:13] So big feel which are and to be more offshore activities. So, yes, they looked almost certainly they were going to lose. It was a bit of a surprise that their troops knocked them back and. Yeah, and then and then now they're back in bed with Woolworths, which has sort of been a bit of a win win for shareholders in the corporate governance. [00:10:31][17.8]

[00:10:31] But the board managing the company, what's the management board look like? [00:10:35][3.2]

[00:10:35] So I mean, categories, colors caused quite well, six out of seven directors, independent with an independent share, a good quality board with executives with so solid experience, managing companies, some of similar companies that have in Australia. The disclosures are good around both financial environmental issues. I think something to think about in 2009/10, Caltex's board conducted a 270 million dollar off market buyback to release franking credits to shareholders. That's something that the board had been criticised about in the past about holding onto this billion dollars in franking credits. Additionally, like the book, Prescotts was well in our mind for their handling of this bidding war in late 2009, 10 or 20 between Crushed Hard and H.A., you saw them getting crushed, hard to raise their bid twice and then engaging with age Briton's A.J., your garages to get sort of competitive tension in the process. I mean, whilst they didn't, we haven't actually sold. I think the board played played their cards very, quite well through there. So, yeah, suffuses is quite a positive thing in corporate governance. [00:11:41][66.0]

[00:11:42] So very well played hand in playing. [00:11:44][1.5]

[00:11:45] Yeah, sort of. Yeah, outside. Absolutely. Outside the Corona virus that they played, they played well. [00:11:51][6.6]

[00:11:53] So regulatory risk looking at the oversight and meddling in the business of business. Look for Caltex in three different things that they operate. [00:12:02][9.0]

[00:12:03] So Caltex operates in a relatively low risk environment. The government having very little interest in regulating service stations. Those sort of in 2010, some Caltex franchises were recorded and underpaying workers. Caltex responded by bringing those franchised service stations in-house. Refining is a heavily regulated business that it's pretty well understood. These refined Luden refineries been running for 50 and 60 years. It's been very few sort of major issues there. [00:12:35][31.8]

[00:12:36] You know, we've also got petrol prices in the mix, which is now on topic here. And the interest on that sort of the regulation or there's an interest rate Caltex does attracted a regulatory interest in that. [00:12:47][10.7]

[00:12:49] It is a major collector of taxes in 2020. The excise tax on the later petrol is quite a surprise, Ellsworth's first find it was forty two point three cents a liter. And this is a tax. It's unavoidable. Most of Australia's 16 million motorists and also quite invisible when you buy your petrol. I mean, while the government's liked the idea of a large takeover of electric vehicles, I mean, in twenty nine to 2019, petrol excise taxes contributed close to $13 billion. The Australian budget and any major reduction in petrol vehicles, this amounts on these little place. So so the governments may want may like the idea of electric vehicles, but they really don't want people to stop using petrol vehicles. [00:13:34][45.0]

[00:13:34] So it be reaching sort of buying their bit like gambling and alcohol consumption in a way for smokers success there. [00:13:43][9.1]

[00:13:44] Yeah, the governments want to see a virtual virtuous signal for everyone to have a little Teslas, but they really don't want to that. It's very hard to find that sort of whole year and that's a lot and definitely be a lot of holes in them if they don't like it. So yes, I'd be very surprised if this large scale, large scale Norwegian style subsidies fail for electric vehicles. [00:14:07][22.7]

[00:14:08] I mean, the next budget, then the same likely to round out the five key points that the the field has known for technological and operating risk thinks they deal with fuel and that's combustible. So there are risks there or it's. [00:14:24][16.2]

[00:14:26] We're OK, we're past the 100th anniversary of the combustion engine. It's that there's been very few issues. It's a very rare. I mean, this company's safety is all is also to prepare, is all relatively solid. It's well known that it hasn't been to pretty big technological risk for Caltech is the take-up of electric vehicles. For obvious reason, those drivers got limited needs to visit one of Caltex's service stations in Australia. Electrical vehicle sales boom pretty limited. The making a point to a per cent of the passenger fleet, something of 50 per cent of celtics' sales of diesel, which is to obviously to trucks. The current battery technology does not allow for training trucks. So currently and not in the near future, is there really an alternative to diesel pairing Stroh's logistics fleet? [00:15:22][56.2]

[00:15:23] What about other fueling alternatives? [00:15:24][1.2]

[00:15:26] Well, there are others that are really competing fuel to electricity is hydrogen that has the advantage over. Electricity is actually being produced by sort of coal fired plants. So hydrogen cars that would be paid off. That's quite a positive for Caltex and offset the threat of a base because the only obvious place to stay in score still liquid hydrogen would be a service station, not some sort of restore at home mean hydrogen powered familiar.. that creates electrical energy using the onboard storage of liquid hydrogen rather than batteries. So the hydrogen is in the cars and converted into electrical energy via a fuze. You sell through an electric chemical process and the wastewater being water falling out the tailpipe. [00:16:11][44.7]

[00:16:12] I mean. [00:16:12][0.1]

[00:16:14] The other of that was to be positive because you've got yes. Consumers go into these convenience stores and petrol stations and also possibly hydrogen stations as well. [00:16:25][11.0]

[00:16:25] Yes, there are other aspects that are on the cards account. I'm not one of the operational risk that celtics' places the rollout of the premium conveyance offering, which is further in and we always measure the risks. [00:16:37][11.6]

[00:16:37] That strategy were reduced in 2008. Tengiz it's not quite that there are petrol wholesalers skill set. The risk to rolling out this premium convenience was reduced two years ago when celtics' partnered with Woolworths to create Woolworths Materne and do the food side of Calvert's is convenience offering. That's sort of a very positive thing, given that Woolworths leverage, Woolworths wholesale grocery supplier and one of Australia's best retailers. So bringing expertise in-house via a joint venture so that and that also sort of single paying dividends. [00:17:11][33.8]

[00:17:11] Now we saw in the most recent supporter quarterly that convenience convenience I was it was a standout result and probably will see more of that in this quarter as consumers change their spending habits dramatically with lockdowns in the life that if we put all of those five metrics together and understand that, you know, the Sudeith walked away from purchase. [00:17:36][24.0]

[00:17:36] Yep. What's your take? Is it a buy in? [00:17:40][3.4]

[00:17:41] Leslie said start with possible hedge funds having excessive selling, unwinding the arbitrage. I thought was a foregone conclusion. [00:17:47][6.9]

[00:17:48] It is an opportunity that selling came yesterday. So it's all gone. The stock's up slightly today and was a fair amount of volume going through. Mick celtics' passes that call it and we actually own the portfolio in a standalone basis trades on a very undermining multiple of eleven times with five per cent and five per cent fully franked yield. It was disappointing to say Krischan hit the pause button on the takeover of celtics' was very understandable. But after three months of due diligence and in two cases and the offer of some comfort that Krischan we're actually pretty happy at the state of Caltex's financials given the kind of asked her channels, that's very understandable in the absence of a further offer from pushed hard or a firm offer from the rival AJ and they've got a non-binding last offer of 30 bucks. We'd expect celtics' to management to now go back to the drawing board and unlock some value to shareholders is a few things they can do because they've identified 50 statistician's sites that will have more value to property Della's than a service stations and also the creation of a service station OPIS team, which is expected to lock between 500 and $750 million based on comparable multiples for other service station trusts such as a favorite and she rate and AQR. There's a few things for this to do. Overall, this is this. However, I would probably expect that once the coronavirus situation moderates expect this to be taken over effect. But failing that, there's a range of things management can do to unlock some value that was clearly seen by these Canadians in the US. [00:19:31][103.1]

[00:19:32] Thank you very much. That insight on ethics in the takeaway as well. Thank you. From Atlas Funds Management. [00:19:37][4.8]

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