Caltex full-year result beats guidance and broker expectations

Australia’s largest transport fuel supplier, Caltex Australia (ASX:CTX), announced on Tuesday morning that it had recorded a Replacement Cost Operating Profit of $524 million for the 12 months to December 31, 2016, ahead of guidance, which was in a range between $500 million and $520 million.

The result was also ahead of analyst’s expectations with Macquarie forecasting a profit of $521.5 million. The group’s profit represented earnings per share of $1.99, comparing favourably with consensus forecasts of $1.92.

Management declared a final dividend of 52 cents per share bringing the full year dividend to $1.02, slightly ahead of consensus of $1.00.

Having outperformed at all levels, the company’s shares hit a high of $30.64 in morning trading compared with the previous day’s close of $29.65. This represented an increase of 3%, and the company’s shares are now trading approximately 8% above the 12 month low that was struck at the start of February.

From an operational perspective the result appeared robust with record production from the group’s Lytton operations where refiner margins were in line with the 10 year average. This area of Caltex’s business generated earnings before interest and tax of $205 million.

Looking to 2017, the company stands to benefit from the acquisitions of Milemaker and Gull New Zealand.

Given that the company has paid a strong dividend, conducted a share buyback program and is due to complete two earnings accretive acquisitions to the value of $420 million in the coming months, while still substantially reducing debt in the second half, the result should be seen as an endorsement of management’s strategy in a challenging environment.

Caltex’s balance sheet leaves head room for further capital management initiatives and/or acquisitions with net debt having reduced from $693 million as at June 30, 2016 to $454 million as at December 31, 2016. Corporate costs were in line with the previous corresponding period.

While the likely ratification of Woolworths’ planned sale of its fuel business to BP (subject to regulatory approval) will have an impact on volumes, management said it is focused on financial discipline and delivering on supply chain efficiency with a view to pursuing profitable growth.

The Milemaker and Gull acquisitions will help to compensate with management saying, “Securing new wholesale and retail volumes such as the recent mail make and Gull acquisitions, and investing in our supply chain including our retail network and core transport fuels infrastructure will assist in generating profitable growth”.

It is worth noting that Caltex is trading on a fiscal 2017 PE multiple of 13.5 relative to consensus forecasts prior to this result, which imply year-on-year earnings per share growth of 14%. This suggests there could be further share price upside, particularly given the 12 month consensus share price target prior to the release of this result was $34.40.

It should be noted that broker projections and price targets are only estimates and may not be met. Also, historical data in terms of earnings performance and/or share trading patterns should not be used as the basis for an investment as they may or may not be replicated. Those considering this stock should seek independent financial advice.