Viva Energy a high-octane IPO, says Morningstar
The float of Viva Energy is a high-octane opportunity despite the threat of electric vehicles and increased competition, Morningstar says.
The float of Viva Energy is a high-octane opportunity despite the threat of electric vehicles and increased competition, Morningstar says.
Senior analyst Mark Taylor has set a fair value estimate of $3 for Viva Energy (ASX: VEA), which staged a $2.65 billion initial public offering last Friday, the biggest IPO in 3½ years.
Viva Energy is Australia's second largest refined fuel supplier, with a market share of 24 per cent, behind Caltex (ASX: CTX) at 27 per cent.
"There is a lot to like about Viva Energy's business," Taylor says, describing its IPO as a "high-octane opportunity".
"The firm enjoys a strategically advantaged infrastructure based from which to refine, store and distribute fuel across Australia.
"It is also one of the most vertically integrated players in the country with the second highest refining capacity, second most comprehensive pipeline infrastructure, the highest number of fuel terminals, and the third largest number of retail sales."
Viva opened last Friday's float at $2.73 before closing at $2.40. At midday today, it was trading at $2.46.
Viva's longer-term earnings growth prospects as "reasonably attractive", Taylor says, "given our five-year revenue capital earnings growth rate of 5.9 per cent and underlying earnings per share growth of 6.2 per cent over the same period."
Viva Energy is Australia's second largest refined fuel supplier
Viva is targeting a dividend payout ratio of 50 to 70 per cent and dividends are expected to be fully franked.
Assuming a 60 per cent payout, the forecast dividend yield range for 2018 is a comparatively pedestrian 4.8 to 5 per cent, Taylor says.
Viva carries no moat – or sustainable competitive advantage – because of several concerns, including the potential increase in alternative fuel vehicles, such as electricity, hybrids or gas-powered cars.
While Australia has been slower to adopt EVs, which Taylor forecasts to remain the case for the next decade, a continuing trend of better fuel efficiency in combustion engines could reduce consumption of hydrocarbons.
"As technology improves," Taylor says, "highly fuel-efficient vehicles, electric vehicles, and other alternative-fuel vehicles will further detract from retail fuel demand."
Another concern is the intense competition in retail and commercial fuel markets in Australia.
"As competitors seek to increase market share, Viva will likely need to sacrifice margin to avoid losing share," Taylor says.
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Lex Hall is a Morningstar content editor, based in Sydney.
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