Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

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<p>Chevron Global plans to sell its 50% stake in Caltex Australia for US$3.6bn. We remain negatively inclined on the deal given:</p><ul><li>The stock has done exceedingly well over the past year but most analyst remain negative on the stock citing increasingly stretched valuations. The stock is trading just 2.5% of its highs. Thus, it might not be the best time to enter the stock.</li><li>The deal wasn't well flagged with a few reports stating that Chevron might sell a partial stake but we see no signs of anyone expecting an all out divestment</li><li>This will be the largest block trade in Australia, as per media reports. The previous largest block place was sale of Royal Dutch Shell's stake in Woodside Pertrolem in 2010 for about A$3.3bn. We note that the Woodside sale represented a smaller percentage of market cap than the present sale and still the stock sank below the deal price in a few days. This sale will be over 180 days of daily volume (although volumes will rise because of higher free float)</li><li>Chevron has stated that the sale is a part of their on going efforts to raise more cash through divestments (owing to lower Oil price) and that they intend to continue all their supply side relationships with Caltex. While the brand licensing and supply agreements will continue for now however with Chevron left with no stake in the business, there remains the risk of licensing and other payments slowing edging up and thus, impacting the longer term performance of CTX.</li><li>The deal doesn't score well on our framework owing to negative score on analyst ratings, the deal effectively being a management sell-down and the stock returns have run ahead of EPS growth over the past five years (large re-rating has already happened), thus, valuations are above historical levels.</li></ul><p>On the positive side of things:</p><ul><li>This will drastically increase free-float and lift weightage in the index, which will entail a certain amount of active and passive funds buying</li><li>The book was already half covered before launch and we are hearing that its already covered now</li><li>The company has been undergoing a turnaround off late and profits have been increasing driven by sale of higher margin premium fuels and broader shift towards higher diesel consumption</li></ul>

Chevron Global plans to sell its 50% stake in Caltex Australia for US$3.6bn. We remain negatively inclined on the deal given:The stock has done exceedingly well over the past year but most analyst remain negative on the stock citing increasingly stretched valuations. The stock is trading just 2.5% of its highs. Thus, it might not be the best time to enter the stock.The deal wasn't well flagged with a few reports stating that Chevron might sell a partial stake but we see no signs of anyone expecting an all out divestmentThis will be the largest block trade in Australia, as per media reports. The previous largest block place was sale of Royal Dutch Shell's stake in Woodside Pertrolem in 2010 for about A$3.3bn. We note that the Woodside sale represented a smaller percentage of market cap than the present sale and still the stock sank below the deal price in a few days. This sale will be over 180 days of daily volume (although volumes will rise because of higher free float)Chevron has stated that the sale is a part of their on going efforts to raise more cash through divestments (owing to lower Oil price) and that they intend to continue all their supply side relationships with Caltex. While the brand licensing and supply agreements will continue for now however with Chevron left with no stake in the business, there remains the risk of licensing and other payments slowing edging up and thus, impacting the longer term performance of CTX.The deal doesn't score well on our framework owing to negative score on analyst ratings, the deal effectively being a management sell-down and the stock returns have run ahead of EPS growth over the past five years (large re-rating has already happened), thus, valuations are above historical levels.On the positive side of things:This will drastically increase free-float and lift weightage in the index, which will entail a certain amount of active and passive funds buyingThe book was already half covered before launch and we are hearing that its already covered nowThe company has been undergoing a turnaround off late and profits have been increasing driven by sale of higher margin premium fuels and broader shift towards higher diesel consumption

Caltex Australia (CTX) - Good track record but deal is too big to swallow - We would avoid the deal

Australia

Ampol Limited provides petroleum products. The Company offers petrol and convenience network as well as refining, importing, and marketing fuels and lubricants. Ampol serves defence, mining, transport, marine, agriculture, aviation, and other commercial sectors in Australia.

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Ampol (ALD AU)

Caltex Australia (CTX) - Good track record but deal is too big to swallow - We would avoid the deal

Chevron Global plans to sell its 50% stake in Caltex Australia for US$3.6bn. We remain negatively inclined on the deal given: The stock has done...

Sumeet Singh

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