Low-sulphur Fuel Production At Geelong Will Improve Operational Efficiency

Key Takeaways

• Strategic investments and acquisitions, including into commercial sectors, support growth and are expected to enhance future earnings and revenue.
  
• Synergy and cost reduction efforts are anticipated to improve margins and operating efficiency, positioning the company for long-term financial gains.
  
• Integration challenges, weak consumer demand, rising costs, and high leverage threaten Viva Energy’s margins, liquidity, and ability to sustain shareholder returns.

Catalysts

Operates as an energy company in Australia, Singapore, and Papua New Guinea.

• Integration of retail businesses and completion of ongoing strategic investments, such as the full acquisition of Liberty Convenience and the investment program at Geelong, are expected to yield $90 million in synergies and cost reductions over the next two years, which will likely enhance earnings beginning in the second half of 2025, impacting future earnings positively.
  
• Expansion in the commercial and industrial segments, including the entry into the marine market at Brisbane and the acquisition of OTR wholesale business, positions Viva Energy for continued growth, particularly in supporting critical sectors like defense and mining, leading to increased sales and revenue.
  
• The low-sulphur gasoline processing plant near Geelong is set to commence production in the second half of the year, which could result in improved refining margins and operational efficiency, positively impacting future gross refinery margins and earnings.
  
• The plan to convert Express stores to the OTR format with higher investment per store than initially expected, but with anticipated higher returns, indicates potential for significant long-term revenue growth and margin expansion as consumer engagement and sales improve.
  
• Accelerating synergy capture and cost reduction initiatives, projected to deliver $50 million in operating cost reductions and margin improvements in FY 2025, albeit weighted to the second half, suggests a leaner cost structure that could lead to enhanced net margins and earnings.

Viva Energy Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Viva Energy Group's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.3% today to 0.9% in 3 years time.
• Analysts expect earnings to reach A$299.9 million (and earnings per share of A$0.2) by about March 2028, up from A$-76.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$508.4 million in earnings, and the most bearish expecting A$105.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.6x on those 2028 earnings, up from -36.5x today. This future PE is greater than the current PE for the AU Oil and Gas industry at 17.7x.
• 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 11.21%, as per the Simply Wall St company report.

Viva Energy Group Future Earnings Per Share Growth

Risks

• The integration of retail operating platforms has been challenging, leading to increased operating costs that may impact net margins and overall earnings.
  
• Weaker consumer demand and illicit tobacco trade have negatively affected convenience sales, especially tobacco, challenging the company's revenue growth.
  
• Elevated operating costs in an inflationary environment are putting pressure on the company's ability to maintain or improve profit margins.
  
• Significant capital expenditures, including integration costs and investments in new projects, have led to a negative cash flow, which could impact the company’s liquidity and financial stability.
  
• High leverage levels due to substantial term debt and revolver usage increase financial risk, possibly affecting the company's ability to manage cash flow effectively and potentially impacting shareholder returns through dividends.

Valuation

• The analysts have a consensus price target of A$2.685 for Viva Energy Group 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$3.55, and the most bearish reporting a price target of just A$1.65.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$32.3 billion, earnings will come to A$299.9 million, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 11.2%.
• Given the current share price of A$1.76, the analyst price target of A$2.68 is 34.6% higher.
• 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.