CTX's Next Evolutionary Chapter

While the announcement of the extension of the Woolworths partnership is being viewed by market commentators and stockbrokers almost exclusively through the lens of only the near-term "earnings" impact, it is a far, far more significant event than just that.

It is significant because it locks in future earnings which had been considered to be at risk for the past two years, given the circumstances around the arrangements with Woolworths.

With that uncertainty now removed, CTX is in a position to mobilise billions of dollars of idle capital sitting on its balance sheet - $1.3bn in property assets (book value, but worth a great deal more) and a near-$1.0bn in franking credits - through a restructuring of its capital base and, thereby, create significant value for its shareholders.

By way of demonstration, this is likely to involve a two-stage process:

STAGE ONE  -  Sell/IPO property portfolio

STAGE TWO -  Undertake structured, off-market buyback with the proceeds


In terms of STAGE ONE, in the current environment of low interest rates, where investors have a keen appetite for yield, CTX's $1.3bn property bank could fetch close to $2.5bn, capitalising the $150m rent it would be able to generate, at a 6% cap rate.

A $2.5bn sale of its property assets would leave CTX in a $1.7bn net cash position (its net debt is currently ~800m).

Of course, CTX's EBITDA would be reduced by the $150m in rent it would now have to pay.  This would be partly offset by a ~$10m lower depreciation charge, so EBIT would be $140m worse off.

Because CTX would not be able to earn this amount in interest from its cash holdings, this stage of the restructuring would clearly be EPS dilutive.


But then, to offset that, in STAGE TWO, CTX would undertake a structured, off-market share buyback (like the one they did a few years ago, but only much bigger) to expunge the franking credits along with the surplus cash which would be sitting on the balance sheet after the property sale.

Assuming all the proceeds of the property sale was applied in the buyback (i.e., $2.5bn), and assuming a buyback price of a  5% discount to the current price (i.e., ~$29.50), CTX would be able to buy back around 85m shares.


The mechanics of such a restructuring exercise are shown in the table below.
(Since analysis of this nature is never going to be perfectly accurate, its conclusions should be treated as being indicative, rather than prescriptive.)


The following salient points warrant mention:

1. From the P&L it can be seen that, on completion of both STAGE ONE and STAGE TWO, EBITDA will be 13% lower, and NPAT will be 18% lower. But, importantly, EPS is enhanced by some 21%.

2.  In terms of the Balance Sheet, while Total Liabilities remain unchanged, Total Assets fall from $6.4bn to under $5.0bn, and Net Assets fall from $3.2bn to $1.7bn.

3.  From the Financial Diagnostics (shaded in green), it can be seen that the exercise will bring about an improvement in EBIT/Assets, and  meaningfully enhance ROE (by almost 10%)  to an attractive level of around 28%.  

4.  The company's financial leverage (Net Debt-to-EBITDA) remains largely unchanged at around 0.7x to 0.8x, and EBITDA-to-Net Interest falls from 20x to a still-comfortable 15x.

5. The Valuation section (shaded in blue, at the bottom of the table), shows the company's share count and hence, market capitalisation, reduces by one-third (compared to this, recall that Net Profits falls by 18%, so the P/E compresses).  The net debt situation is unchanged, so the Enterprise Value falls by 30% (compared to this, recall that EBITDA falls by 13%, so EV/EBITDA multiple compression occurs).

6.  The EV/EBITDA multiple reduces from 7.8x to 6.3x, and the P/E multiple reduces from 14x to 11.6x.




Caltex is over-capitalised.  

For the first time in many years, the board is in a position to address this.

And clearly, this sort of capital restructuring - which is the sort of thing that the CTX board is contemplating at the moment - has the ability to liberate significant value for shareholders.

We know that an announcement concerning the review of what to do with CTX's property portfolio will be made next month when the company reports it interim result.

And one thing is for sure, if CTX does undertake such an exercise along the lines of the above analysis, there is no way that the stock will be trading at the resulting valuation multiples of less than 12x P/E and 6.5x EV/EBITDA.


At 15x P/E and 8.0x EV/EBITDA - objectively not at all unreasonable for a well-managed, >25% ROE business with significant barriers to entry - it implies a share price closer to $40.

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