Caltex’s (ASX: CTX) share price was hammered early this morning, trading down 5.7% on the back of a 54% fall in first half profit. The rise in crude oil prices hurt the results, since margins were squeezed when petrol prices paid by end consumers did not increase as fast as crude oil prices.
Caltex share’s fell this morning on the back of disappointing results (Credit: Downer)
Australian fuel demand declined 2.2% on pcp, which management believes is due to underlying weakness within the Aussie consumer. This weakness, attributed to a global economic slowdown, sluggish wages growth and negative wealth effects from declining property prices, has been a key feature throughout this reporting season. The company is a good proxy for its industry, given all industry participants face similar pricing pressures, highlighting the challenging position that global oil markets are in.
The company has responded with measures to cut costs and ensure better capital discipline. One of these initiatives is to sell 50 sites that management believes will have better uses as something other than a petrol station, which represent nearly 10% of the company’s retail fuel outlets. Overall, Caltex estimates that the cost out program will cut $100m p.a. in costs by 2020, which will position the company to be one of the most efficient operators in the industry if fully realized. Given cost reduction has been a key driver of earnings over the past few years, investors can rely on a management team with a strong track record to reduce costs further and remain competitive.
Caltex is a fuel, infrastructure and retail business, and is one of the largest within the Australian market. The firm targets a payout ratio of 50-70% over the economic cycle and aims to be in the top quartile of comparable businesses by TSR (total shareholder returns). While the company has been successful at cutting costs thus far, shareholders will need to monitor the increasing competitive pressures in the industry to make sure they are comfortable with the business going forward.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
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