In our view, the notes have at least 100bps margin contraction given where the BBB universe is trading and are an “outperform”. The reason we don’t expect further spread contraction from here is that the issuer has four bonds in AUD outstanding and so there is high supply to soak up versus other respective issuers. That’s a fair bit of debt that will need to be refinancing going forward.
We have strong conviction in the credit profile of Ampol having produced strong recent 1H22 results. This was supported by a significant uplift in oil prices driven largely by the Lytton Refinery which was the major strength of the result. Although earnings may come off the highs in the 2H22 result due to the correlation with Brent crude oil prices, Ampol’s slimmer structure and strategic successes are a positive foundation for future earnings. Additionally, the continued recovery in retail and international sales should help the business. Jet fuel volumes are still recuperating from COVID-19 lows while Australian and New Zealand retail petrol demand is also below the 2019 baseline. Higher mobility flow would flow directly to Ampol’s top line.
Cashflow generation remains strong and the balance sheet was already well positioned pre the Gull divestment. While there have not been any issues with the Z Energy acquisition it is still in early-stage integration. We consider the earnings-related leverage metrics as sound but do expect balance sheet gearing to gradually reduced over time.
On a relative value basis, we view the notes (2080 and 2081) as offering good value against other BBB issuers. We note there is a discount for the notes because of the inherent subordination and ESG issues. Being the front-runner in the electric vehicle (EV) rollout is only a competitive advantage if the group can create a sizeable moat. It is our preference to see most growth capex spend allocated to its EV charging offering. That said, we note the 2082 notes are sustainability-linked and are trading significantly tighter given their “green” premium.
Ampol launched AMPCharge in April 2022 and commenced the rollout of its electric vehicle charging network with the first sites operational in July. We view the market leadership here as a positive given the transition to EV has been gaining traction for some time now yet charging stations are almost exclusively at home for users. Furthering this value proposition, the group have received energy retailer authorisation during the half and are piloting a retail electricity offer (at-home charging) with a small group of employees in 2H22.
Fundamentals
Earnings & Cashflow
For 1H22, Ampol benefitted from a 66% higher weighted average Brent crude oil price vs pcp, producing a significant 83% uplift in underlying revenues to AUD17.3bn and a 168% increase in profits from continuing operations to AUD445mn. A AUD290mn inventory gain from such elevated oil pricing helped drive a statutory NPAT of AUD719mn, 109% higher than pcp. The increase in inventory held, paired with higher crude and product prices resulted in an AUD841mn increase in working capital. Management expect this position to wind back for future periods.
The revenue improvement was almost entirely a function of the Fuels and Infrastructure (F&I) segment, with segment sales 82.4% higher than pcp to AUD13.1bn. F&I earnings growth was a feature across all three sub-segments with Lytton the breadwinner. Lytton’s RCOP EBIT contribution of AUD444mn was eight times the pcp of AUD49mn, realising the somewhat exponential benefits of higher crude oil prices. The Lytton Refiner Margin (LRM) was USD22.35 per barrel for 1H22 up from USD5.90/bbl in 1H21. The rise here was predominantly a function of the LRM spiking to USD32.96/bbl for 2Q22.
The combined impacts of the Omicron variant, floods and high retail fuel prices reduced demand and compressed margins for the Convenience Retail segment. Fuel volumes were 5.8% lower on a like for like basis while the rapid rise in the cost of petrol compressed margins due to the lag in passing on such prices through to retail. Despite difficulty on the fuel front, shop performance remained strong, a continued testament to the strategic overhaul of stores. Improved product mix, promotional activity and reduced waste saw an improvement in shop gross margins of 2.3% while the average basket size also grew. Network rationalisation continues to be a factor for the group as 17 stores were closed over the half with one added as Ampol looks to exclusively operate its best performing assets.
(note pcp = prior corresponding period)
Balance Sheet & Capital Management
The acquisition of Z Energy (previously ASX/NZX: ZEL) was completed on 10 May 2022 with earnings contributions included in the group’s result for May and June 2022. ZEL has now transitioned to a full import model and operations were not affected during this transition. Integration is well progressed with preparations underway to combine the Z supply chain into Ampol’s Trading and Shipping operations in Singapore, with Ampol still confident it can deliver the estimated benefits of NZD60-80mn pa. Z Energy contributed an EBIT of AUD14mn in 1H22.
The Gull divestment was completed on 27 July 2022 resulting in cash proceeds of NZD524mn which will be reported in the FY22 accounts. The supply to Gull continues at around 500mn litres pa.
On a pro forma basis, net borrowings are AUD2.5bn following the divestment of Gull, for which settlement occurred in July 2022. The group’s liquidity position remains strong with AUD5.9bn in undrawn facilities and AUD273mn in cash held at 1H22. Leverage as measured by adjusted net debt/EBITDA is 2.6x as at 30 June 2022, while pro forma leverage is 2.2x. Management are focused on sustainably returning the group’s leverage to its target range of 2.0-2.5x, including the increased investment in the group’s energy transition. As part of the group’s capital allocation framework, residual capital is first allocated to stay-in-business capex, ensuring an optimal capital structure and then the payment of dividends. Following this, capital will be allocated to either growth capex or returned to shareholders if leverage is less than 2.0x, or if growth opportunities are not earnings accretive. Gearing defined as net debt/(equity + net debt) at 1H22 was 42.4%, a substantial increase from 17.8% as at 31 December 2021, with the AUD2.2bn increase in net debt partially offset by the AUD694mn increase in total equity.
Relative Value
Source: Bloomberg
Ampol secondary subordinated curve vs BBB universe
Source: Bloomberg
Financials
Source: Bloomberg
