Morgans has recently been involved in the initial public offer of Viva Energy Group (Stock Code VEA.ASX). VEA is one of Australia’s leading integrated downstream petroleum companies having operated for 110 years and supplies about one quarter of Australia’s fuel needs through a nationwide retail network of service stations, most of which are Shell branded, and services commercial customers across a diverse range of industry sectors.
Viva Energy has a diversified revenue base in its commercial and specialty businesses with strong market positions in key industry sectors, serving long-standing customers in the aviation, marine, transport, resources and construction sectors.
Viva Energy’s fuel products are supplied to consumers via a national network of 1165 retail sites. Most of these sites form part of the Coles Alliance and are controlled by Viva Energy. Viva Energy is aligned with well recognised brands including Shell, Coles Express, Liberty Oil and has the sole right to use the Shell brand for the sale of automotive fuels in Australia.
In addition, Viva Energy owns and operates the second largest in processing capacity and greatest conversion capacity refinery in Australia, which is strategically located in Geelong, Victoria, and adjacent to one of the larger fuel markets in Australia.
We believe VEA has attractive market dynamics, with a 24 per cent of market share in the concentrated Australian fuel sector. Australia’s refined product demand is underpinned by a robust economy, energy intensive industries which require long distance travel by road, air and reliance on commercial road freight. Fuel powered vehicles dominate the Australian market, with electric vehicle (inc hybrids) sales remaining limited, making up 0.06pc of the passenger car fleet in 2017.
The security floated at a price of $2.50 per security, and has experienced some weaker trading conditions initially closing on their first day of trading at $2.40. This is not uncommon during early days of a company floating on the market, as you see the share register settle post the IPO process being conducted.
We believe VEA remains a high quality business which has the potential to prosper as an ASX listed company. With a strong balance sheet and minimal debt, optionality exists for how they look to grow as a business in the future, with options to invest in growing organically as well as management having indicated their desire to make acquisitions. The number of cars on the road has been increasing at 2.5pc compound, industrial demands for refined petroleum products in rising steadily in Australia and convenience retail is an ever growing trend. Improving fuel efficiency and, longer term, higher penetration of electric cars are offsets and refinery margins are volatile however we believe the positives outweigh the negatives.
- Justin Still Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410