Caltex to lift dividend payout but warns of earnings hit

October 30, 2018
Caltex Australia has flagged higher dividend payouts for shareholders but chief executive Julian Segal has insisted the business is being harmed rather than helped by pump prices that have reached 10-year highs and brought unwanted scrutiny to the industry.
The fuels and convenience retailer said it will in future pay out between 50 and 70 per cent of its benchmark net profit in dividends, up from 40-60 per cent, and also flagged likely one-off capital returns through share buybacks.

But the rising prices have hit retail earnings, with Caltex advising of a $20 million negative impact in the September quarter as fuel sales volumes and margins were curtailed by the high oil price and low Australian dollar.

The national average unleaded petrol price reached $1.605 a litre last Sunday.

An unexpected outage of a unit at Caltex’s Lytton refinery in Brisbane this month also took a toll, reducing earnings by $15-$20 million, while refining margins are expected to be affected in the fourth quarter by soft gasoline margins.

But Vertium Asset Management portfolio manager Jason Teh said the profit issues were only short-term, putting more importance on the clarity given by Caltex management about the capital management strategy.

“From a long-term point of view given that they articulated clear capital management guidelines that’s a positive,” Mr Teh said.

“It gives shareholders a clear understanding of how they can return the massive amount of franking credits on the balance sheet.”

Caltex said it would consider capital returns when net debt is less than 1.5 times earnings before interest, tax, depreciation and amortisation or headroom exists within its target range.
Mr Segal said that after significant changes at the company over the past five years, “we are confident in our business and our ability to deliver on our commitment to maximising shareholder returns.”

Range of changes

Those changes included stabilising the refining business around the Lytton refinery, and making acquisitions overseas to help fill an earnings gap that was expected to emerge with the loss of a large wholesale contract with Woolworths. But in July Caltex entered a new 15-year fuel supply deal with the supermarket owner, while the pair also extended their convenience retailing alliance. Caltex is also developing its own convenience retailing offer through its “The Foodary” concept.

“We now have better line of sight over the next little while so it is reasonable for us to increase the payout ratio now,” chief financial officer Simon Hepworth said, adding Caltex would retain the ability to invest in growth “where it exists”.
He said Caltex would still always be interested in further acquisitions if the right opportunities arose, to build on the success of overseas moves such as Gull New Zealand and Seaoil in the Philippines.

Mr Teh said he expected Caltex to make further overseas moves given the platform its Ampol business in Singapore provides to grow in trading and shipping.

In August Caltex posted a smaller-than-expected 1 per cent increase in benchmark profit for the first half. Some investors were also disappointed in August when Caltex decided on a more gradual restructuring of its property assets compared to a spin-off or sale.

Mr Segal said on Tuesday that in 2019, Caltex’s fuels and infrastructure business would continue to grow its earnings in its international operations and look to improve margins through its supply chain.
In convenience retailing Caltex will look to leverage opportunities in its partnership with Woolworths, with Mr Segal describing that as a “key focus” for next year, including the roll-out of 10-12 Metro stores in the next 12 months. Growth in Caltex’s own reworked retail offer, named “The Foodary”, will take a pause, however, with the company pointing to a “consolidation and revisit” in the first half next year, “prior to recommending further roll-out in 2H19”.

Mr Hepworth said of the the 51 “Foodary” stores up and running, only 36 have been running for more than six months. Some are performing “phenomenally well”, ahead of target, and some are not.

He said Caltex would look to improve the underperforming sites to get consistent results across the stores.

“Once we are satisfied the Foodary offer is returning consistent results then we will continue to roll those out appropriately in conjunction with the Metro offer as well,” Mr Hepworth said.
“It is just…a little bit of a pause to make sure that we are getting the offer where it needs to be in terms of earnings and returns and then we can re-energise the rollout of the Foodary once we’ve done that.”

Caltex said its earnings in 2019 are expected to be higher than this year, while capex will be about 30 per cent lower.