"I'm looking for a boring stock, a compounder, one that doesn't surprise."
@Gareth,
Viva Energy is a sort of business that is unlikely to present any surprises - either positive or negative, for that matter. It is really like a large oil tanker (apt metaphor, there) which is difficult to dislodge off course.
But what VEA is not is a "compounder" (by "compounder", I assume you mean a business that is able to organically grow its Revenues, Profits, Cash Flows, and Dividends over time). Rather, it is a mature business, which - for investing purposes - should rather be viewed as a sort of fixed income security.
As such, it will never command a premium valuation multiple (say, 20x P/E and 12x EV/EBITDA). Instead, its valuation multiples will reflect the quasi-bond characteristics of its financial performance, i.e., relatively consistent, but not growing, Fee Cash Flows which get distributed to shareholders.
And on that note, while 20x P/E and 12x EV/EBITDA is too high, its current pricing of ~12x P/E and ~6x EV/EBITDA is - given the hard-to-replace asset base and the resilience of its earnings and cash flows - is arguably too low.
I think that 14x to 15x P/E and 7x to 8x EV/EBITDA "feels" appropriate given the nature of the beast.
So when it comes to viewing VEA as an investment opportunity, I see it as something that offers some 20% to 25% upside, with limited downside risk, and then once that fundamental undervaluation is corrected, modest ongoing long-term returns of around 6% to 8%pa (.
Of course, as has been discussed in previous posts, there is the technical overhang of stock due to a less-than-stellar stag profit outcome on IPO, which I think will continue for a while (8 or 10 weeks, possibly until the end of the year), but which is creating a good buying opportunity for the discerning, value-minded investor who doesn't take his/her cues from what the share price is doing on a day-to-day basis.
"My understand of this company is it's a retailer (Shell/Coles Express) , commercial supplier of aviation/Marine fuel, a landlord via VIVA Energy REIT) refiner.
Seems most of their profits are from their retail division ($308M in last half - so well over 50%)"
Yes, that about sums it up. Including some significant fuel infrastructure and oil refining assets.
And it is that integrated model which makes the earnings of the company durable and resilient.
"What happens when cars become electrified and no longer use fuel?
Will the stations adapt to electric charging and open cafes whilst we wait, or other businesses - much like Coles is trying to drive business through Coles Expresses?
What happens to the real estate - will they repurpose, will it go up in value?"
What needs to be remembered is that fuel volumes have already been declining in Australia for more than a decade, due to more fuel-efficient vehicles and reduced personal driving habits.
Yet this has not stopped the fuel distributors, provided they have the scale economies and the best service station location, from actually increasing their earnings from the sale of fuel over time.
So, sure the notional "pie" in terms of fuel volumes has been shrinking, but because it is the independent fuel retailers that are exiting the market first, the majors - with their integrated supply chains - are picking up the sales from the retailing capacity that is exiting the market.
Not just that, but the major fuel companies have developed what they market as proprietary fuel products, for which they have been able to engender a degree of brand loyalty and thereby allowing them to garner some additional margin. I personally don't know why motorists would pay more for a certain "brand" of fuel, but for some reason, they do.
So while the volume pie is falling, for the major fuel retailers the revenue pie is not.
And - somewhat counter-intuitively - the profit pie is actually going up (!).
And yes, there will be a tipping point, at which the juice from the lemon is fully squeezed, but my sense is that we are still many years off when this will become a major headwind to earnings for this kind of business.
What exactly VEA will look like in 20 or 30 years' time, I can't say for sure, but I think that certainly in 10 years' time not too much will have changed, except at the margin, maybe.
And by that time, I strongly suspect VEA will have been long down the path at re-configuring itself for whatever its future looks like at the time.
As it has no doubt done for the past 50 or 60 years (or however long it has been doing business)
(I recall reading some dramatic reports in the early 2000's which were sounding the death knell for fuel retailing in Australia. That has indeed transpired for the sub-scale operators, but the major players, with their significant resources, have been able to re-invent themselves at each turn.)
PS. On the subject of dramatic and sensational media reports, I see an attention-grabbing headline today that suggests China is "considering legislation" to ban the exclusive manufacture of internal combustion engines in China. I suspect this has only served to spur on the selling intentions of non-natural holders of VEA shares.