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Viva Energy Group (VEA)

Missing perhaps was a high kicking chorus line singing Viva Las Vegas. Because yesterday’s performance from Viva Energy had shareholders stomping in the bleachers for extended encores.

CEO Scot Wyatt isn’t remotely an Elvis impersonator. But the show he produced was crowd pleaser and the share price jumped almost 20% into the mid $1.80’s. It had everything – a capital buyback, diversifying from its loss making refinery operations, and much improved fuel margins. Viva is the exclusive supplier of Shell fuel and lubricants in Australia, through a network of about 1300 service stations. Since the company’s IPO it has, for shareholders, been a Coney Island rollercoaster ride.

The news of better fuel margins suggests first half 2020 EBITDA will be up the upper end -$270-280 million with net profit close to $30 million. The share price will also be underpinned by the first tranche buyback of $50 million. The total buyback is $650 million.

While the current first half dividend will be skinny – perhaps a couple of cents at best, going forward under the current management plan, shareholders income stream could increase to around 13-15 cents over the next couple of years. Forecast price earnings multiple sit around 9 times, and that reflects the execution risk. As that risk mitigates the share price could get a bit of a giddy up towards $2.30. Viva by nature is a cyclical business, which explains why it trades at historical discounts. And current plans could see some of that discount disappear as earnings get de risked.

The refining business is still a drag on earnings and losses could amount to just under $50 million in this June half. The plan is keep the refining business ticking over as margins are expected to improve in the next 18 months. And the possibility of the Federal Government’s strategic fuel reserves build up could be a major benefit to the Geelong operations. This includes LNG supply and storage and Viva is calling for JV partners to lower the risk of its potential expansion in supplying the gas hungry southern states.

The management pivot is everything is on the table, with the likelihood the first half earnings will only be slightly off key previous estimates. Energy is naturally the pivot focus and that includes LNG imports, hydrogen, batteries, solar and gas fired generators – the whole nine yards.

What is helping Viva transform is retail fuel margins which have risen by about 8 cents a litre and are forecast to improve further. As most consumers would know it takes longer for fuel prices to go down but they sure as hell go back up quicker!  Lower crude oil prices have played into that equation, but the biggest factor has been more rational competition and less discounting.   

Viva’s grinch moment maybe the Australian competition and Consumer Commission. It keeps a watchful eye on fuel price margins. But that will be an industry wide situation and not specific to Viva.

So to all of you would be Elvis’s – grab the hairbrush microphone and crank out the Viva lyrics – “bright light city going to set my soul……

The remainder of us curmudgeonly audience will clap politely as we see the VEA share price rise.  

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