Viva Energy Placement - News Leak Helps but It's Still a Big One to Digest

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Equity Capital Markets

Viva Energy Group  / Equity Capital Markets

<div class="content-highlight"><p style="text-align: center;">Quality stock and value closer to high-octane than regular unleaded</p></div><hr><p style="text-align: left;">We think investors can comfortably invest in the initial public offer, or IPO, of <a href="https://www.smartkarma.com/entities/27220" target="_blank" data-smartkarma-citation="entities:27220:1">Viva Energy Group Limited (VEA AU)</a>, or Viva, as the IPO is priced below our AUD 3.00 per share fair value estimate. Based on the indicative pricing range of AUD 2.50 to AUD 2.65 per share, we do see reason to invest in the IPO though more moderate buy recommendation than strong buy as the offer range equates to a 4-star rating, below our highest 5-star rating. There is a lot to like about the Viva business. It is the second-largest refined fuel supplier in Australia at 14.2 billion litres or 24% share of the 60 billion litre market overall, second only to largest player <a href="https://www.smartkarma.com/entities/345" target="_blank" data-smartkarma-citation="entities:345:1">Caltex Australia Ltd (CTX AU)</a> with approximately 27% share. 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 third-largest number of retail sites. The pipeline and terminal infrastructure furnish competitive advantage, though we don't think sufficiently to justify an economic moat.</p><hr><h2>Key Takeaways </h2><ul>
<li>Viva enjoys a strategically advantaged infrastructure base from which to refine, store, and distribute fuel across Australia. It has a market-leading position in Victoria, and near-market-leading positions in most other Australian states. Since Shell's Australian downstream operations were acquired in 2014, Viva management has delivered noteworthy two-year underlying pro forma EBITDA CAGR of 11.1% to AUD 700 million. </li>
<li> Our base-case DCF fair value estimate of AUD 3.00 per share assumes revenue and EBITDA CAGR of 5.9% and 5.2%, respectively, over the next five years. We have adopted prospectus forecasts for 2018 and first-half 2019. However, unlike Viva, we include <a href="https://www.smartkarma.com/entities/22851" target="_blank" data-smartkarma-citation="entities:22851:1">Viva Energy REIT Ltd (VVR AU)</a> and Liberty Oil contributions in underlying earnings. Consequently, our underlying 2018 and first-half 2019 NPAT forecasts are AUD 345 million and AUD 191 million, respectively, slightly higher than Viva's AUD 306 million and AUD 171 million. </li>
<li>Our Viva fair value estimate equates to a 2022 EV/EBITDA multiple of 8.6 to Caltex at 8.4, high enough we think given risks. Investing in older and far smaller refineries than Asian mega-cousins is a potential trap that must be carefully navigated, and the distant but regardless real threat from electrification of transport is an inevitable market detractor. </li>
</ul><hr><p><em>Analysts: Mark Taylor and Angus Hewitt</em></p>

Quality stock and value closer to high-octane than regular unleadedWe think investors can comfortably invest in the initial public offer, or IPO, of Viva Energy Group Limited (VEA AU), or Viva, as the IPO is priced below our AUD 3.00 per share fair value estimate. Based on the indicative pricing range of AUD 2.50 to AUD 2.65 per share, we do see reason to invest in the IPO though more moderate buy recommendation than strong buy as the offer range equates to a 4-star rating, below our highest 5-star rating. There is a lot to like about the Viva business. It is the second-largest refined fuel supplier in Australia at 14.2 billion litres or 24% share of the 60 billion litre market overall, second only to largest player Caltex Australia Ltd (CTX AU) with approximately 27% share. 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 third-largest number of retail sites. The pipeline and terminal infrastructure furnish competitive advantage, though we don't think sufficiently to justify an economic moat.Key Takeaways 
Viva enjoys a strategically advantaged infrastructure base from which to refine, store, and distribute fuel across Australia. It has a market-leading position in Victoria, and near-market-leading positions in most other Australian states. Since Shell's Australian downstream operations were acquired in 2014, Viva management has delivered noteworthy two-year underlying pro forma EBITDA CAGR of 11.1% to AUD 700 million. 
 Our base-case DCF fair value estimate of AUD 3.00 per share assumes revenue and EBITDA CAGR of 5.9% and 5.2%, respectively, over the next five years. We have adopted prospectus forecasts for 2018 and first-half 2019. However, unlike Viva, we include Viva Energy REIT Ltd (VVR AU) and Liberty Oil contributions in underlying earnings. Consequently, our underlying 2018 and first-half 2019 NPAT forecasts are AUD 345 million and AUD 191 million, respectively, slightly higher than Viva's AUD 306 million and AUD 171 million. 
Our Viva fair value estimate equates to a 2022 EV/EBITDA multiple of 8.6 to Caltex at 8.4, high enough we think given risks. Investing in older and far smaller refineries than Asian mega-cousins is a potential trap that must be carefully navigated, and the distant but regardless real threat from electrification of transport is an inevitable market detractor. 
Analysts: Mark Taylor and Angus Hewitt

Viva Energy Group

Viva Energy Group Limited Pre-IPO Report