Viva profit downgrade has lessons for Coles

Chanticleer
Nov 19 2018
AFR
Viva Energy Group’s 16 per cent profit downgrade carries lessons for other public companies new to the share market and the most obvious is Viva’s partner, supermarket chain Coles, which will list separately on Wednesday.
Coles’ new chief executive, Steven Cain, could well study Viva’s approach to communicating with the market now that Cain is directly responsible for the Coles share price.
Viva’s profit downgrade was inevitable and not very timely. The market woke up more than a month ago to the fact that Viva’s refining margin forecasts contained in the prospectus published in July were too ambitious.
Take a look at the share price and the rising short interest and it is clear that observers could work out something that took the company a long time to admit to.
It would seem Viva has suffered from the complaint that affects many public companies that have previously enjoyed life in private hands. It struggled to understand how to communicate with alacrity.
One obvious question is this: Why was Viva willing to this month make forecasts about its refining margin for two months in advance when it was not willing to do so in September?
Bearish descriptions
The profit downgrade comes a week after the company made a presentation to the UBS conference in Sydney with a business update that included bearish descriptions of the refining business but no word on the outlook for the refining margin.
Companies that are new to the stock exchange have a history of taking some time to work out how to keep the market fully informed. This looks like a case in point.
The recent decline in the Viva share price was helped along by the totally unnecessary public repudiation of Viva’s wholesale fuel pricing strategy by Cain. Instead of batting away questions about the issue Cain made it one of the most important issues on his first call with analysts.
Cain now finds himself in a similar position to the chief executive of Viva, Scott Wyatt. Cain’s actions and performance will be judged by movements in the Coles share price. As Coles chairman Michael Chaney said last week, the market is looking for returns over two to three years rather than 10 years.
Invidious position
The pressure will be on Cain to figure out how to resolve the differences with Viva over fuel pricing. At the moment Coles passes on the full wholesale price set by Viva. Viva has refused requests by Coles to cut its price.
Viva said on Monday that total retail fuel volumes for fiscal 2018 “are expected to be between 1.0 per cent and 1.5 per cent below the prospectus forecast of 14,086 million litres”.
The Coles strategy of having the most expensive fuel in the market is immaterial to Wyatt at Viva. He said on Monday that the decline in fuel volumes only hit Viva’s retail division profits by $10 million out of a total of $600 million.
Wyatt has already taken the pain of the lower volumes while Cain is in the invidious position of being in charge of a newly listed public company that cannot afford to come to market with declining profits in a key division.
Coles does well out of its convenience store business, which includes Coles Express stores at Shell-branded petrol stations. It has a good return on capital but Cain will have to resolve the differences with Viva at some stage