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A lot can change in two months. Just ask Caltex.
It was on August 28 that chief executive Julian Segal and chief financial officer Simon Hepworth spooked the market by cutting the fuel group’s dividend as it pushed on with a series of investments, including in its petrol station convenience business.
The stock dipped 8 per cent that day, and investors were blunt with what they wanted to see from Caltex.
“It’s just spraying capital left, right and centre and I think the market has voted with its feet,” Airlie Funds Management portfolio manager Matt Williams told Chanticleer at the time.
“We’d be encouraging more capital discipline and then capital then being redirected to a much higher payout ratio.”
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On Tuesday, Williams got part of his wish, with Caltex announcing it would lift its payout ratio from 40 per cent to 60 per cent up to 50 per cent to 70 per cent, and would consider returning excess capital to investors through buybacks.
Segal and Hepworth said the company had been listening to shareholders, but placed the payout ratio increase in the broader context of Caltex’s transformation over the past five years.
It has gone from a business that was 50 per cent owned by Chevron, losing money on refinery and supply operations and running a generic retail offer, to an independent ASX 50 company with profitable refining operations, an Asian trading hub, and a plan to boost retail earnings by as much as $150 million from its new convenience strategy.
Short-term headwinds
Williams will welcome the change, whatever the logic behind it.
But Tuesday’s investor day also underlined that while Caltex has come a long way, shareholders remain wary about its next phase amid some short-term headwinds.
The Caltex message is that this is a company that can offer stable and strong cashflow from its fuel and infrastructure business (underpinning that higher payout ratio) as well as real growth options, through continued overseas expansion and the convenience push.
Caltex’s relatively new acquisition of the Gull business in New Zealand, and its investment in the Philippines group Seaoil, are performing well, and Segal will look for opportunities to grow the international business over time.
But perhaps most importantly, he insists that Caltex, with some help from Bain, has done with work to make the convenience push a success.
The model for the potential growth in the convenience fuel sector comes largely from countries such as Britain and Japan, where spending rates are up to six times higher than in Australia.
But despite a few gallant attempts, no operator has quite been able to crack the fuel convenience code in Australia as of yet.
Segal says Caltex has left no stone unturned in its push. In the last 18 months, every member of its retail team bar one has been turned over, and replaced with hires from Coles, Woolworths and other big chains around the world.
The lessons from early stores have been learned, and the top quartile of the stores that are now up and running are delivering very strong sales growth.
Segal says Caltex’s decision to take back ownership of its retail stores and end franchising is also crucial, as it means it can now control quality, consistency and service levels.
Supply chain
It is also getting on top of the challenges of supplying chilled and fresh food, and Segal argues the new agreement signed in July with Woolworths – with which it operates a string of co-branded sites – further strengthens its retail network and its supply chain.
Investors are likely to reserve their judgment until they see some solid results from the convenience strategy. This wariness has been heightened after Caltex also said on Tuesday that its retail earnings took a $20 million hit in the September quarter compared to the run rate in the first six months of the year, as higher oil prices and weaker Australian dollar weighed on demand.
Caltex shares slipped 1.6 per cent lower to a 52-week low of $27.40. The stock is now down 19.5 per cent since the start of the year.
Segal says his key message to investors from the strategy day was to appreciate the size and scope of Caltex and the transformation that been delivered.
“There is every reason for investors to trust us,” he told Chanticleer.
This is clearly a company that has come a long way in the past five years. But investors are always looking towards the next leg of the road trip.
James Thomson
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