What is the stock? 

Caltex Australia

How long have you held the stock? 

12 months

What do you like about it? 

We like Caltex’s ability to reinvent itself and react to external change. Industry changes are seeing declining petrol and diesel volumes and a swing to imported volumes rather than domestic refined products. Caltex has converted its Kurnell refinery into a receiving terminal and ripped the costs out of its Lytton refinery to successfully accommodate and challenge imports. Meanwhile it has moved to a mix of higher margin premium fuels which more than offset overall declining industry volumes. Caltex is developing new competitive strategies to accommodate new technology as the world looks towards electric cars. Beyond the bowser, Caltex is developing a new convenience retail model, emphasising fast, fresh food which has been successful in overseas markets.

How is it better than its competitors? 

Selling commodity products like fuel does not generally lend itself to sustainable competitive advantages, but Caltex currently has the advantages of good outlet locations, good infrastructure to get products to market, and time – being further down the path of change than competitors. The sale of Woolworths Petrol to BP must first pass ACCC and FIRB approval early 2018, and then integrate and rationalise giving Caltex a head start.

What do you like about its management? 

Caltex’s management has a great mix of vision and pragmatism, commitment of capital for future change while maintaining tight cost controls. The CEO and CFO are a perfect pair bringing a lot of experience and directional change to the table.

What is your target price? 

We see Caltex at $38.00 in the next year.

At what point would you sell it? 

As with any stock, we will sell it when a strong share price performance makes it no longer look good relative value compared to other opportunities we see in the market. We currently view the outlook as positive but would sell if we lost confidence in the retail strategy or if there was some technological development leading to a rapid acceleration in the uptake of electric vehicles.

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

Over the last 12 months, Caltex has had a neutral impact on the overall portfolio.

Is it a liquid stock? 

Caltex is a top-50 stock, with an $8.5 billion market cap, which generally trades $30-60 million per day.

Where do you see the value? 

The market was quick to acknowledge the impact on earnings from the loss of Woolworths Petrol sites to BP. However, the company has well-advanced plans to both mitigate this near-term headwind as well as developing a long-term growth strategy. Combined with the fact that stock is trading at a significant discount to the market and has a very strong balance sheet, see it as a clear value opportunity.

Source: ASX. Data as at Thursday 1 June, 2017

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