Viva’s listing on the 13th of July was less than overwhelming, opening at $2.43 and closing the day at $2.40 - versus its issue price of $2.50. At $4.8bn, it was the largest IPO since Medibank, and the largest non-Government IPO in Australia’s history. And this would appear to be part of the problem.
The market has a clear case of indigestion, as short term holders who were looking for a stag profit, capitulate and make way for more patient capital.
We saw a similar pattern with both Ingham’s and Bingo. Ingham’s was issued at $3.15 per share, opened trading at $3.14 and dipped to $3.10 en route to an eventual low of $2.98. But once the overhang was cleared, the underlying business was recognised for what it was, and the stock recovered to a (recent) high of $4.10. Bingo similarly listed below its issue price of $1.78 (adjusted for rights issue), trading as low as $1.54 before eventually recovering to $3 per share.
There are some strong similarities with Viva, as both of these IPO’s were large, ‘boring’ but solid old economy companies, with reasonable barriers and long term operating histories.
In our view Viva is an even stronger business. Of course there is no perfect company – or as we say at Katana ‘the only perfect company is the one that hasn’t been researched properly.’
In the case of Viva, whilst electric vehicles are getting all the headlines, the biggest threat is actually the fuel efficiency of new models. As drivers replace models that are 10-15 years old, they are seeing a significant reduction in the level of fuel consumption.
But this is a known known, and is largely mitigated by the diversification of the business (aviation and commercial) together with net migration and organic and corporate growth. And there are some strong positives which we believe weight the risk-reward equation in our favour.
In summary terms these include:
- Large infrastructure assets that would be challenging to replicate, including:
- largest network of fuel terminals
- largest refinery on the east coast, and the second largest in Australia
- second largest fuel pipeline network
- third largest retail network.
- When combined with aviation and wholesale, Viva is actually #2 in Australia with 24% market share, thus enjoying tangible benefits from economies of scale, but with the possibility of further growth.
- Cheaper than Caltex on enterprise value (EV):EBITDA metrics; in addition, if the earnings from the REIT and Liberty are included above the line, then Viva is trading cheaper than Caltex on a PER basis.
- Pristine balance sheet (only 3% gearing), providing ample options for M&A, organic growth and/or capital management
- Nearly $650m in additional investments including $588m in ASX listed Viva Energy REIT (VVR).
- Stable sector with a small number of large, rational competitors and a large number of small clients
- We are likely to see sizeable passive or index buying given the inevitable inclusion in the S&P ASX100 index.
As an old Shell man beware what is under the ground!