How long have you held Caltex?

We have held Caltex since February 2013.

What do you like about it?

Caltex comprises of two businesses:

• National Import, Distribution and Marketing (“IDM”) of transport fuels
  • 90% of value
• Refinery business (Kurnell in Sydney and Lytton in Brisbane)
  • 10% of value

We see the value of Caltex in the IDM business. We like the IDM business for the following reasons:

• Scale is required to procure, store and distribute an environmentally sensitive product – Caltex has the critical infrastructure in place and serves 30% of the Australian market.
• Reliability of brand and supply is critical – Caltex provides both to a stable wholesale (including Woolworths) and retail network.
• Demand is predictable and to a large extent non-cyclical with low working capital requirements.
• Shift to high-octane fuel and diesel provides significant margin uplift over the next few years.

Caltex announced they are closing the Kurnell refinery from financial year 2014 – this has been a highly capital intensive business with a volatile earnings pattern, mainly due to the variability of crude oil and exchange rates. This facility will be converted into an import and storage facility. The remaining Lytton refinery is a more advanced facility that requires less capital expenditure and has a more flexible production platform. The closure of the Kurnell plant should de-risk the overall Caltex business.

How is it better than its competitors?

It has strategic distribution assets (Hunter pipeline) and an exclusive jet fuel pipeline to Sydney airport that creates barriers to entry. It also has a long-term fuel and diesel supply agreement with Chevron, its 50% shareholder.

What do you like about management?

Management has a good track record operationally. Closing the Kurnell refinery also demonstrated their ability to make hard decisions in allocating capital sensibly.

At what point would you sell it?

We would sell it when it reaches our price target (based on after-tax cash flow yields) and does not offer value anymore.

How much has it added to your overall portfolio over the last 12 months?

Caltex is one of our top 10 holdings and has added materially to our performance.

Where do you see the value?

We can acquire Caltex at a sustainable after tax cash earnings yield of 8%, growing at 6-7% per year for the next 3 years. It also has $1 billion of surplus franking credits.

By Anton Du Preez.

Prior to joining Pengana Capital in February 2009, Anton was with Rand Merchant Bank (RMB) for five years. In this role he managed a value proprietary fund in Australia for two years, and before that a similar RMB fund in South Africa. Before joining RMB, Anton was a co-principal of a market neutral hedge fund based in Cape Town, South Africa. Anton is a Chartered Accountant (South African and Canadian) and a Chartered Financial Analyst.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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