Investments In Low-Sulfur Fuels And EV Charging Will Expand Offerings, But Project Risks May Affect Future Margins

Key Takeaways

• Investment in renewable fuels and EV infrastructure aims to drive revenue growth and enhance competitive position in low-carbon transport markets.
  
• Strategic expansion in retail and international trading is expected to boost revenue through increased customer engagement and discretionary sales.
  
• Large capital projects and investments in EV charging networks risk straining resources, potentially affecting cash flow and margins if returns fall short.

Catalysts

Ampol Limited purchases, refines, distributes, and markets petroleum products in Australia, New Zealand, Singapore, and the United States.

• The declaration of FID for the Lytton Ultra Low Sulfur Fuels Project and the investment in asset reliability are expected to improve gasoline cracks and enhance refinery margins, which could contribute to earnings growth.
  
• The expansion of the on-the-go EV charging networks in Australia and New Zealand aims to capture the increasing demand for electric vehicle infrastructure, potentially driving future revenue through increased customer engagement at refueling sites.
  
• The strategy to grow Australian retail capabilities and premium retail sites, including highway sites and convenience stores, is anticipated to drive revenue growth through higher fuel volumes and increased shop sales.
  
• The development of renewable fuels, specifically the strategic focus on renewable diesel and SAF production at Lytton, aims to position Ampol advantageously in the transition to low-carbon transport fuels, potentially impacting revenue and margins positively by capitalizing on demand from both heavy transport and aviation sectors.
  
• The potential establishment of a trading office in Europe in 2025 is aimed at enhancing Ampol's international trading capabilities, which could grow F&I International earnings over time, supporting revenue and earnings growth from discretionary sales activities.

Ampol Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ampol's revenue will decrease by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 1.9% today to 1.8% in 3 years time.
• Analysts expect earnings to reach A$654.0 million (and earnings per share of A$2.75) by about February 2028, down from A$705.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$815 million in earnings, and the most bearish expecting A$499 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.0x on those 2028 earnings, up from 9.4x today. This future PE is greater than the current PE for the AU Oil and Gas industry at 13.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.95%, as per the Simply Wall St company report.

Ampol Future Earnings Per Share Growth

Risks

• Ampol's cyclical commodity-linked business segments, such as Lytton and F&I International, faced lower earnings, indicating potential volatility and vulnerability to global commodity market shifts, which could adversely affect future revenues and net margins.
  
• Total fuel sales volumes decreased by 6.5% year-over-year, primarily due to reduced discretionary sales in the international business, potentially indicating challenges in capturing market opportunities and a future impact on revenue growth.
  
• The retail fuel sales in Australia and New Zealand were down, with specific reductions in base-grade petrol and Z Energy's volumes, indicating potential softness in retail channels and consumer demand, which could impact future revenues and net profits.
  
• The commitment to large capital projects such as the Lytton Ultra Low Sulfur Fuels Project and ongoing investments in EV charging networks might strain resources and affect cash flow and net margins if these projects do not deliver the anticipated returns.
  
• Highly capital-intensive projects, such as the Ultra Low Sulfur Fuels Project and EV network rollout, amidst tight labor markets, pose execution risks and potential delays, which could increase costs and affect future earnings and margins.

Valuation

• The analysts have a consensus price target of A$32.659 for Ampol based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$36.0, and the most bearish reporting a price target of just A$31.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$35.5 billion, earnings will come to A$654.0 million, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of A$27.89, the analyst price target of A$32.66 is 14.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.