by Jack Derwin
Everyone may soon be driving electric vehicles but that doesn’t negate the value of oil and petrol stations in the eye of these investors.
The future of internal combustion engines doesn’t look very bright, but Australian investors aren’t writing off companies exposed to them just yet.
At the Morgan Stanley Australia Summit in Sydney this week, there was a rare moment of unity where all three fund managers present on a panel to discuss opportunities in small caps named Viva Energy as a stock they happily own in their portfolios.
Michael Higgins from Milford Asset Management named the owner of the Geelong oil refinery and several Shell petrol stations among his top stock picks, even though he also predicts many people will be driving EVs within the next 15 years.
“The driver has to spend three to four times longer charging their EV. They’re not filling up, picking up a Mars Bar and heading out. You’re actually spending quite a bit of time at these locations,” Higgins said, noting the retail business could operate on a higher multiple.
A little over 12 months ago, Viva acquired 700 Coles Express stores and more than 220 On The Run (OTR) South Australian petrol stations which derive three quarters of their profits from sales of non-fuel products. It added those to its existing ownership of Shell-branded stores as it looks to take advantage of structural shifts underway in the auto industry.
“We think that’s a really big opportunity for Viva management over the next couple of years to execute on and transition these Coles Express sites, which are in great locations but are pretty tired, into far better convenience offerings,” Higgins told the Morgan Stanley Australia Summit on Thursday.
Converging on a similar bull thesis were his fellow panellists, Eleanor Swanson from Firetrail Investments and Oscar Oberg from Wilson Asset Management, whose funds also own the stock.
“We really like it on a three year view off the back of the On The Run acquisition and what that will do to their convenience business. There is huge upside there,” Swanson said.
On Friday, Viva shares traded at $3.22. Macquarie has an outperform rating on the stock, with a price target of $4.40 on it as Viva was added to the ASX 100 index this month, favouring it over its larger rival Ampol.
All three believe the market is overlooking a key potential driver for the stock: a subsidy introduced by the government in 2021 which underwrites the cost of refining if margins become squeezed.
“Viva and Ampol are literally the only refiners that I know of globally, where your upside is all the company’s upside in terms of refining margins and profit, but your downside is fairly capped,” Higgins said.
“We like the fact that during times of expanding margins, they’re reinvesting that cash from the two times multiple [refining] business into a higher multiple business being convenience.”
While all three funds own the stock, Firetrail trimmed their position amid rising cost of living pressures. Tobacco sales have also been declining, triggered by the proliferation of vapes and rising prices.
In a note on Friday, Macquarie analysts noted Viva’s fuel volumes were being eaten into by discount competitors but were being offset by higher diesel sales.
Oberg threw in his faith in the Viva management team to execute but joked that the fact all three fundies were all in agreement rated as a “sell” sign.
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