Woolworths: Petrol business finds another buyer

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Alex Lu
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By Alex Lu
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Date posted:
12 November 2018, 9:32 AM
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Key points

  • WOW has announced the sale of its petrol business to EG Group for A$1.725bn.
  • We estimate the deal represents an FY19F EV/EBIT multiple of ~8.5x, which is a fair price in our view relative to listed peers Viva Energy (8.7x) and Caltex (8.9x).
  • We make no changes to earnings forecasts and maintain our Hold rating on a higher target price (Morgans clients can log in to view). We see the deal as positive for WOW after a two-year long sale process.

WOW sells Petrol business to EG Group for A$1.725bn

WOW has announced the sale of its petrol business to EG Group for A$1.725bn. EG Group is a British retailer that operates petrol stations in Europe and the US. The sale price is not too far off the A$1.785bn that BP had agreed to pay for the business before the ACCC announced its intention to block the transaction earlier this year.

The deal is subject to FIRB approval and completion is expected in early 2019. We do not anticipate any competition issues with the transaction given EG Group does not currently operate in Australia. WOW said following completion of the transaction it will consider a range of options for the use of the proceeds, including capital management initiatives.

The price looks reasonable

We estimate the deal represents an FY19F EV/EBIT multiple of ~8.5x. Given Viva Energy (VEA) is currently trading on 8.7x and Caltex (CTX) is on 8.9x we think WOW got a fair price as well as transaction certainty compared to if it had decided to IPO the business in the current market.

The price is also close to what BP had agreed to pay so overall we believe it was a good outcome that gives WOW significant balance sheet flexibility with the prospect of further capital management on the horizon.

Exposure to the convenience sector maintained

As part of the deal, WOW and EG Group have entered into a 15-year commercial agreement covering fuel discount redemption, loyalty and wholesale product supply. Key features of the alliance include the continuation across the network of WOW's 4cpl fuel discount, the ability for customers to earn Woolworths Rewards points on fuel and merchandise purchases, and the wholesale supply of food by WOW to the network.

The agreement is similar to the one WOW struck with CTX and maintains its exposure to the faster-growing convenience market.

Maintain Hold rating

While we make no changes to earnings forecasts given the transaction is still subject to FIRB approval, our PE-based target price increases (Morgans clients only) as we see the deal as positive for WOW and ends a two-year long sale process. However, with a forecast 12-month TSR of 2% we maintain our Hold rating.

Upside risks to our valuation include stronger-than-expected growth in Australian Food sales, larger-than-expected increase in group EBIT margins and smaller-than-expected losses sustained by Big W. Downside risks include increased pricing intensity, more competitors entering the supermarket sector and a slowdown in sales momentum.

More information

Morgans clients can login to view our detailed report and revised share price target for Woolworths (WOW). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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