Petrol and diesel supplier Viva Energy has given a more subdued than expected outlook for retailing earnings for the rest of the year after posting a 40 per cent drop in first-half profit due to tough conditions in refining and intense retail competition.
The company, which listed on the Australian Securities Exchange last July after a $5 billion float, has signalled it may take longer than some investors had hoped for the restructured alliance with Coles Express to feed through to higher returns from fuels retailing. The stock closed down 7.9 per cent.
It pointed to retail margins that remain lower than average so far this half due to heightened competition, oil price volatility and a lower Australian dollar, which has lifted prices at the pump.
As a result, if the weakness persists into the second half, underlying earnings from that business are unlikely to improve from the June half, chief executive Scott Wyatt advised.
Mr Wyatt said fuels sales volumes under Viva’s alliance with Coles had stabilised since Viva took over responsibility for pricing in March and were well placed to grow, while margins in refining improved in July.
Still, JPMorgan’s Shaun Cousins said the guidance for flat earnings before interest, tax, depreciation and amortisation for the retail division half-on-half was about 13 per cent below his forecast, “suggesting all benefits of the Coles Express retail fuel margins are being reinvested due to the challenging industry backdrop”.
Shares in Viva closed down 7.9 per cent to $2.10 at the close on Monday after the company reported underlying net profit of $78 million for the six months ended June 30. The figure was down from $129.6 million a year earlier but toward the upper end of Viva’s revised profit guidance in June of $60 million-$80 million.
The stock has consistently struggled to maintain its $2.50 issue price in the initial public offer, although traded as high as $2.57 in March.
Group-wide earnings before interest, tax, depreciation and amortisation for the June half was $171.6 million, within revised guidance given in June of $150 million-$180 million.
Viva declared an interim dividend of 2.1ยข per share.
Still, Mr Wyatt said he was “very happy” with how Viva’s retail strategy was progressing. He cited positive signs that the new competitive pricing strategy would pave the way towards increasing weekly sales volumes to 70 million litres a week, and then to 75 million, up from about 60 million litres a week in the June half.
The retail business posted underlying gross earnings of $283.3 million in the June half, while the commercial business generated earnings of $155.6 million. Refining posted earnings of $18.4 million, at the upper end of guidance in June, when Viva warned profits could be as low as zero.
Viva’s Geelong refinery recorded an average gross margin for converting a barrel of oil into a barrel of petrol, diesel and other fuels of $US5.10 a barrel in the half, down from an average of $US7.40 a barrel in 2018.
But the refinery operated strongly, processing 21.4 million barrels of oil in the half, up from 19.1 million a year earlier. Diesel reached a record 40 per cent of total production.
The Geelong refining margin rose to $US7.70 a barrel in July, but Viva said the margin and processing volumes this September quarter would be hit by maintenance work.
Viva announced the acquisition of the Liberty wholesale business in the first half but is still awaiting approval from the competition watchdog.
Viva also released adjusted results after adopting new accounting standards for the treatment of leases. Those also showed a drop in earnings from the June half of 2018.
Extracted from AFR