Now could be the time to buy Viva Energy Group Ltd (ASX: VEA) shares.
That's the view of analysts at Goldman Sachs, which have just upgraded the ASX 100 stock.
What is the broker saying about this ASX 100 stock?
Firstly, in case you're not familiar with Viva Energy, it operates a convenience and fuel network of almost 900 stores across Australia, and exclusively supplies fuels and lubricants to a total network of approximately 1,300 service stations.
On Monday, it released its half year results and revealed a 25% increase in earnings before interest, tax, depreciation, and amortisation (EBITDA) to $452 million.
This went down well with the broker. Its analysts commented:
VEA reported 1H24 results broadly in line with our expectations with A$452m EBITDA in line, A$192m NPAT 3% above, and a 6.7 Acps interim dividend 4% below our estimates.
And while the broker notes that the ASX 100 stock's major OTR acquisition is taking longer to transition, it isn't all bad news. It explains:
Our key focus was on early OTR store transition planning and progress after VEA completed the A$1.2 bn acquisition in March, and we had been cautious of a slower than expected roll-out. VEA confirmed the initial transition will take longer than expected after being impacted by town planning and landlord consent delays, now targeting 30 transitions over the next 12 months compared to an original target for 10% (~70) by Dec 2024.
OTR store performance outside of South Australia and excluding QSRs highlighted a post-conversion opportunity for A$0.2m+ gross margin net of wages improvement for 500+ stores, with the A$100m opportunity excluding QSRs and fuel volume improvement well above A$50m+ targets previously presented.
Broker upgrade
In response to the update, the broker has upgraded the ASX 100 stock to a buy rating with a slightly trimmed price target of $3.60. Based on its current share price of $3.07, this implies potential upside of just over 17% for investors.
In addition, Goldman is forecasting a fully franked 5.2% dividend yield in FY 2024. This stretches the total potential return beyond 22%. The broker concludes:
We revise our 2024/25/26 EBITDA 0%/-7%/0%, our PT -4% to A$3.60/sh, and upgrade to Buy (from Neutral) on (1) Convenience earnings inflection targeting 18% EBITDA CAGR over the next 5 years, (2) Attractive valuation trading at ~7x EBITDA and a 16% discount to our SOTP valuation, (3) Strong refining margin capture over the next 12 months with Geelong at capacity and able to benefit from an expected recovery in middle distillate cracks.
