Brokers assess a convenience retail acquision which will further diversify earnings for
-Acquisition of
-The new deal complements the recent Coles Express transaction
-
-Upside scenarios for earnings and valuation
The share price of Viva Energy ((VEA))) closely tracks the difference between the price of crude oil and the prices of refined products, referred to as the crack spread.
The company is the second-largest refined fuel supplier in
Viva imports, blends and delivers fuels, lubricants, solvents and bitumen through its national and international supply chains.
Only last month,
This correlation may be set to change, however, after the company announced the acquisition of South Australian-based, family-owned fuel and convenience business
Non-fuel earnings would rise to 50% from 30% of gross profit post completion, according to the broker.
Such a material repositioning prompts Macquarie to suggest Viva is realising its vision of becoming "a convenience retailer that sells fuel, rather than a fuel retailer with a convenience offer".
The
There are other potential advantages from the transaction, suggests
The analyst believes this new deal de-risks and improves the potential upside from the Coles Express acquisition by capturing the brand rights and capability of the highly regarded OTR team.
Macquarie concurs with
Apart from
The deal may, however, raise competition red flags for the ACCC, as it combines OTR's circa 160 integrated fuel and convenience stores in
As a result of this regulatory uncertainty, Macquarie,
Moreover,
Additional capital expenditure and more overall capital overall will be required to secure annual synergies in the areas of procurement, marketing and functional support, cautions this broker.
A commensurate increase in risk to equity can arise from higher earnings funded by increased debt, observes the analyst, a factor often overlooked by the market.
The acquisition cost of
Potential upside for earnings and valuation
Potentially, investors will apply a higher multiple to Viva's earnings stream as it diversifies away from fuel distribution, suggests
Canadian convenience style retail company
This broker believes Viva can continue to payout 70% of earnings providing a 6-7% dividend yield. Once synergies are achieved, it's expected net debt to EBITDA will remain below the bottom end of the company's 1-1.5 times target range.
The average target price for
Of the four brokers, two have a Buy (or equivalent) rating and two have Hold recommendations.
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