Ampol – Stock of the month August 2023

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Simon Conn and Lucas Goode discuss why they like Ampol and think it’s well positioned for the future including its hard to replicate fuel distribution footprint, expanding margins, and increasingly attractive industry structure.

Edited transcript

Simon: Welcome everyone. I’m here today with Lucas Goode, who covers Ampol for Investors Mutual. This is a stock that we’ve owned for some time, and really, I think it represents a really interesting opportunity in the current market. So today, we just want to talk a bit about Ampol and explain why we like it and why we think it has the attributes that are really suited to our portfolios. I think in the outset, Lucas, it’s been one of the most successful rebrandings I’ve seen. To move from the branded fuel, retailing business of Caltex, rebranding the company as Ampol, I think has really reinvigorated their retail network. And really given birth to to the new Ampol that we see today. But, look, I think, you know, you know the assets very well. You’ve been following stock for some time. So I think maybe just from the outset explain why we like the business, and, you know, why we think it’s well positioned going forward.

Lucas: Thanks, Simon. So I think the first thing to highlight is that, you know, for us, where the market sees a sunset industry entering a period of potentially terminal decline, which is an interesting view given Ampol actually reported record annual profits, less than six months ago. We see irreplaceable strategic infrastructure and an increasingly attractive industry structure at the same time.

I mean, one of the great things about a perceived “sunset industry” is that it discourages new entrants. And so we’ve seen this market become increasingly consolidated, both on the retail side and on the wholesale and commercial side. With the big three players of Ampol, as the largest, BP and Viva Energy controlling more and more of the market. And that’s resulted in stable and growing retail fuel margins and stable and growing wholesale and commercial fuel margins. Even as volumes continue to rise despite what the public may think.

Simon: Yeah. I think it’s important, Lucas, to understand that, you know, the business of Ampol, is not just a retail business, it’s the infrastructure, the terminals, the pipelines, the trucks, the trains that move fuel, highly flammable material, which is, you know, a valuable asset, around the country.

Lucas: That’s absolutely right, Simon, Ampol’s got a hundred people sitting in Houston and Singapore to do nothing except trading cargoes making sure they’re getting the best prices for their products that allow them to eke out more of that margin. And, again, it’s just a footprint that’s almost impossible to replicate. Especially now they’ve got also got Z Energy in New Zealand. I guess another thing to touch on is that refining previously was seen as a real negative part of Ampol. It was one of the things people didn’t like about owning the business because you had this volatility of earnings, but actually it’s become something of a one way bet.

Simon: Yeah. And I think that’s an important point because I think people missed the, fuel security levy and the implications that’s had for the industry. So we did have four refineries in Australia. We now have two, one run by Viva, one run run by Ampol, and the government have put in place a fuel security levy. Which means that when those earnings are volatile and when they go below cost of production, the government steps in and pays Ampol to ensure that earning stream isn’t a burden to shareholders of Ampol. I think that’s really important because there is that volatility. I think before quite rightly pointed out, which caused noise in the profit and loss statement, the cash flows, which kept investors on the side. So I think it’s really derisked it and puts the business in a much better position going forward.

Lucas: And the great thing about that refinery still being open as well, Simon. It’s not just that, clearly, as we’ve said now, losses are somewhat mitigated. And you do sometimes get these areas of super profits like we saw last year, with the Russian invasion of Ukraine. But also strategically it’s enabled to Ampol to carve out a much bigger share of that commercial market because BP and Mobil don’t have a refinery anymore. So they can’t provide the same downstream supply that Ampol is able to supply.

And look, I think even just going back to the retail side, you know, we remain of the view that the decline of hydrocarbon usage it’s going to be a lot more gradual than, you know, maybe people might think if they happen to live in a suburb where everyone’s driving a Tesla. Because actually, the majority of Ampol’s fuel volumes aren’t going into passenger vehicles at all. We’re talking about aerospace. We’re talking about marine, trucks.

Simon: Yes.

Lucas: Heavy vehicles, the mining industry. These are all going to be major sources of demand for a long time to come. And, you know, even on the retail fuel side, Ampol’s unparalleled service station network is actually a great strategic asset even in a world where more and more people drive EV’s. And the example that I’d point to is actually Norway, which has the world’s highest EV penetration. I think it’s about 80% of new vehicles – might even be more than that. And yet the number of service stations in Norway hasn’t changed over the past decade, and actually service stations are more profitable than ever. Because it turns out EV customers, they visit more often, and they spend more while their car’s charging, than their petrol powered counterparts. So, you know, the the EV doesn’t have to be the death of service station, whatsoever.

And what it does highlight is the value of that high quality, high margin convenience retail offering, which Ampol, it’s still got some way to go, I think to get it just right. You know, we’ve seen the value of these assets with, with Viva buying on the run for a very high multiple relative to Ampol’s current trading multiple. And we also actually saw with Couche-Tard, which is the owner of the largest petrol station network in Norway, offering $38 a share for Ampol in 2019.

Simon: Yeah. That’s a great source of frustration for shareholders, in terms of, you know, where the stock price is today, at $33. It’s well below the $38 that Couche-Tard bid, back in 2019, which is paradoxical and frustrating given that Ampol actually have a significantly larger business today, having bought and integrated the Z Energy business without raising any equity. So the business’ profitability is much higher than it was previously, and yet the share price still trades at a discount to that takeover price. So really we just think, at current multiples less than 12 times, yielding 6% fully franked, on an EBITDA multiple of 6 times. The business is very attractively and cheaply priced. Particularly in a market where a lot of other stocks look pretty fully priced. Particularly, I think, given the nature of the business, has been, I think, de-risked to an extent, and much more stable and very cash generative.