What is the stock?
Caltex (ASX code: CTX) operates oil refineries in Sydney and Brisbane, producing transport fuels such as gasoline, diesel and also jet kerosene. The company earns a margin on refined products. A second, but growing, Caltex arm operates an extensive distribution chain for fuel and general retailing.
How long have you held the stock?
Caltex is a recent acquisition for the portfolio. Losing the 3.5bn litre per year Woolworths fuel supply contract saw the share price turn downward sharply in the last quarter of 2016. The stock fell from approximately $35 to $29, a decline of about 20%. We used the opportunity to accumulate a position.
What do you like about it?
Fuel and retailing is a competitive business. However, Caltex has a number of key assets:
- extremely well located sites
- a well-developed supply chain system that Caltex can leverage off.
We also like the fact that the business has been undergoing a transformation in the past few years, moving away from the capital intensive and volatile refining business. Today Caltex is a much more transparent and easier to understand company.
We look for well-financed companies. Caltex fits that criteria. The balance sheet is strong with gearing expected to peak at just under 17% this year and will decline to single digits within three years.
How is it better than its competitors?
Caltex’s footprint across the country is excellent. The backbone of the company – its supply chain system, is well developed – and offers opportunities to grow revenues by bolting retail services and products.
What do you like about its management?
CEO Julian Segal has done a great job to reposition the company away from a highly capital intensive and potentially volatile business. Management continues to be forward looking to extract growth potential that is latent in the company.
What is your target price?
We have a Net Present Valuation of $34.
At what point would you sell it?
We would look to sell down closer to our target price or if there is significant change to refining margins.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
We expect Caltex to deliver shareholder value over the next three years for the portfolio.
Where do you see the value?
Caltex is starting to articulate its retail strategy in the convenience service sector. The first pilot stores are starting to emerge with the potential measure success over the next 12 months. It’s a sensible strategy to extend the penetration of its well-located physical sites. This could add incremental growth to the business at relatively low capital costs.
Source: Yahoo!7 Finance
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