The case for Caltex Australia (ASX:CTX)

Funds Management

by Jessica Amir

Antares Equities Head of Research, Andrew Hamilton, talks about the inherent value in Caltex Australia (ASX:CTX) and the impact of the rise of electric vehicles on the business. 

Stephen Barbarich: My name’s Stephen Barbarich, I’m a Research Manager for NAB Asset Management and today I’m joined by Andrew Hamilton, Head of Research at Antares Equities. Thanks for your time Andrew.

Andrew Hamilton: Hi Stephen.

Stephen Barbarich: I believe one of the stocks that the investment team really like at the moment is Caltex Australia (ASX:CTX). Given the focus on alternative energies and the popularity of electric cars, how do you think that’ll impact the future outlook for Caltex?

Andrew Hamilton: It’s a great question Stephen and it’s one that we do think about a bit. But it’s one that’s given rise to what we think is a great investment opportunity. Clearly electric vehicles are here and they’re only going to grow. However, at the moment penetration of them is very very small, in terms of the total vehicle fleet. It takes the Australian vehicle fleet more than 10 years to turn over in its entirety. So we think really before electric vehicles are material, in terms of their damage that they can do to total fuel distribution, you’re looking at a decade or more.

So when we run our valuation for Caltex, particularly a 10-year plus valuation scenario, we see that we capture most of the value in that 10 years. And at the end of that period, they’re left with significant physical asset value. And that’s not even worrying about whether they can execute on their convenience retail strategy.

We look at other companies in the Australian market, where people aren’t worried about disruption companies like CSL Limited (ASX:CSL) and Cochlear Limited (ASX:COH), being fantastic Australian companies. But something like 70 or 80 per cent of their value, resides more than 10 years out. And there are issues like gene therapy and stem cell therapy that might in fact mean, that they can’t realise that value.

Whereas for Caltex, everybody’s entirely fixated on electric vehicles, only about 40 per cent of Caltex’s value relies more than 10 years out. So we think that there’s a real dissonance there, between the way the market is looking at different stocks.

Caltex is a business that’s not well understood, they don’t just sell fuel to the consumer and to large companies. They import most of that fuel, because Australia doesn’t produce much oil. The import terminals are controlled by the four large majors, 49 of the 53 Australian import terminals are controlled by those four groups.

The market isn’t valuing that infrastructure at all. In fact on our numbers, we estimate that that infrastructure in Caltex’s business, only trades on a multiple of about five times EBITDA, so earnings before interest, tax, depreciation and amortization. Those same assets trade globally on multiples of 12 to 18 times.

And so on our estimates, if Caltex were to achieve a valuation on those infrastructure assets of about 12 times at the bottom, that would add about $10 to their current share price of $34. So we think there’s a real potential, significant investment upside here from a company that is being impacted in its share price, largely by sentiment.

Stephen Barbarich: Thank you Andrew, that sounds like a really exciting opportunity. Thank you for your time this afternoon and we’ll see you next time.