The Viva Energy Group Ltd (ASX: VEA) share price fell 8% yesterday on an update to financial guidance and have continued their downward slide today, dropping another 2.76% to close at $1.94 per share. Viva Energy advised profits could fall over 40% this financial year on lowered retail fuel margins.
What did Viva Energy announce yesterday?
Viva Energy provided guidance of underlying net profit after tax for FY19 of $135–165 million down from $229 million in FY18. Earnings before interest tax depreciation and amortisation are predicted to fall to $625–655 million, down from $770 million in FY18, with overheads increasing from $293 million to $330–335 million.
Top line sales growth has been strong, with sales volumes increasing 4.3% for the financial year, but oil price volatility and heightened competition have contributed to the compression in retail margins. Refining performance was also strong with periods of record production. Earnings have, however, been impacted by lower refining margins in 1H2019.
Sales in the commercial segment have been robust despite softer economic conditions and slower economic growth. Nonetheless increased ocean freight and effects of lower exchange rates have compressed commercial margins.
Fuel sales in the Alliance network have been successfully stabilised following the renegotiation of the partnership with Coles Express. Fuel sales were approximately 60 million litres per week in 1H2019 rising to 65 million litres per week in 2H2019, representing an increase of 9.2% over 1H2019 and 4.8% over 2H2018.
Sixteen stores were added to the Shell and Liberty-branded network throughout 2019. Network development is now focused on filling gaps to improve coverage and lifting fuel and convenience offers though new site formats.
Retail fuel margins were lower in FY19 than FY18 due to oil price volatility and competition but have strengthened in the final quarter. The focus now is on optimising local market pricing and improving site efficiency.
The commercial business successfully renegotiated and extended a number of expiring contracts and secured new contracts to support future growth. Commercial earnings were impacted by continued competition and a lag in passing through cost increases in certain commercial contracts, in particular rising shipping costs and lower exchange rates.
Supply, corporate and overhead costs were impacted by increased property costs associated with network growth and annual escalation, supply chain management and coastal shipping, and the full year costs of being a publicly listed company. Certain one-off costs, including those associated with the Liberty acquisition and reset of the Alliance agreement, were also incurred.
Foolish takeaway
Viva Energy has been hit by a number of factors that have impacted the bottom line this financial year. These include margin compression, rising shipping costs, and falling exchange rates. No doubt the fuel refiner and retailer will be hoping for some relief in 2020.
