From 'Viva believer' to 'Viva Leaver'
Back in November 2018, we wrote exclusively for LiveWire that we remained a ‘Viva Believer’ as the stock plumbed to the depths of $1.70 and below. We reasoned that there was still insufficient evidence to indicate whether the significant decline in the refining margin was cyclical or structural. At the time, we felt that the worst case scenario was already factored into the share price and the risk-return equation was weighted to the upside.
As it turns out, we were right for the wrong reason. The Viva share price has indeed recovered – up nearly 50% to its original IPO price. But the main driver has been the strong deal Viva management were able to re-negotiate with Coles – not a recovery in refinery margin.
With the price back in the black, the risk-return equation looks decidedly different. To continue to hold, our view is that we need to be confident that the refinery margin will recover and recover quickly. Here’s why.
Buried in the last results presentation was this table:
As the table highlights, a US$1 drop in the refinery margin results in a $29m decline in EBITDA – presumably for the half. The Geelong Refinery Margin was forecast to average US$9.20 per barrel in the prospectus but came in at US$7.40/bbl. However, what is particularly alarming is that this same margin averaged just US$4.0/bbl in January. Whilst February’s number has not yet been reported, we doubt it is any better and possibly worse. If the margin doesn’t increase significantly and quickly, then on our calculations Viva is staring at a further earnings downgrade.
We said in our last post: “if signs emerge that there is a structural deterioration in any component of the Geelong Refinery Margin, then we will be required to re-think our position.”
We have been lucky on this occasion, as the refinery margin has not recovered but the share price has. The equation is now stacked in favour of selling.
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Katana Asset Management was founded in September 2003 as a boutique investment management firm. Katana employs an all opportunity investment mandate being style, sector and market cap agnostic.