Vivo Energy on the right track preparing for tomorrow’s world on the continent
Vivo Energy hasn’t exactly lit up the JSE since plumping for a secondary inward listing on SA’s bourse, having gone public on the London Stock Exchange in May 2018.
Part-owned by private equity group Helios Investment partners, trading giant Vitol and oil group Shell, Vivo is nonetheless a stock to watch for investors with an eye to benefiting from African economies’ growth.
The company is also in the throes of buying more than 300 Engen-branded service stations, although the deal is taking longer than some would like.
Business Day asked CEO Christian Chammas (CC) and chief financial officer Johan Depraetere (JD): Why is the Engen purchase taking so long?
CC: There’s still one remaining country that has to be closed [the Democratic Republic of Congo]. It is a work in progress, we’re avoiding to put too much haste in it to avoid falling into obvious traps, so that will come when it will come. How key is the Engen deal?
CC: It is a fast-track way of growing when you’re not in countries, and the Engen deal brings us nine new countries out of 10. It is a game-changer, so it’s important we go for it. But if it doesn’t happen, we’ll move on.
JD: Just to put things into perspective, 2017’s ebitda [earnings before interest, tax, depreciation and amortisation], we were at $376m, and the Engen countries would bring $50m, so it is significant but it’s not going to double our business overnight. Why it’s a game-changer: greenfields expansion in our business is impossible, so the only way you can enter a new country is through acquisition, and this deal gives us access to nine countries. What would scupper it?
CC: It’s an interpretation by the DRC government, which owns 40% of the company, of what their pre-emptive right is, and obviously we have our own interpretation. It is the issue and we have to find a way around it.
How important is nonfuel retail to Vivo? You’ve signed a joint venture to open a KFC in Ivory Coast, for example.
CC: It is an accelerator, because instead of doing one or two here, suddenly through a joint venture you can have a plan of 10 or 15. It gives you better visibility. Why do we want it? It brings money, more revenue, and allows us to expand our offerings in different locations.
We have a lovely footprint, and with Engen we will have 2,100 sites, so if you graft to that all these extra offerings, be it convenience or food or otherwise, you will see what you get in SA when you go to those sites. The more we have these partnerships, the better we are. What will it represent as a percentage of our business in the end? Maybe 10% or 15%.
What is Vivo’s investment proposition, particularly for South African investors given that you chose to have a secondary listing here?
CC: We are becoming a panAfrican company. We also have partners that have their roots or base in SA, so all this is a company that brings growth in countries that have potential, and that’s why we went to Johannesburg. The other objective was to prepare for tomorrow’s world: if we do have a big acquisition, be it in SA or otherwise, to raise capital through [being listed] is very efficient. If we buy something big in SA, it would make sense to raise the funds through Johannesburg. Have you attracted much institutional interest in SA?
JD: Yes.
Are you a play on GDP growth in which you operate rather than a play on the oil price? I imagine it’s almost incidental considering out of the 15 countries you operate in, 12 have regulated fuel prices?
CC: Spot on. When we did our roadshows the message we used to communicate was that the margins in 12 out of 15 countries are basically fixed. We renegotiate them once a year and what we try to do is make sure these margins are indexed to the US dollar or euro, so we don’t see erosion in the margin. Over a period of 15 to 16 years, you can see the variations of the barrel [price of oil] and at the same time you see the country’s GDP growing constantly. Over that period fuel volumes have grown about 3.5%, and that usually represents 75% of the country’s overall growth, so those countries would have grown by an average of 5%. That is why in the guidance in our IPO [initial public offering], we estimate that volumes would grow by between 4% and 5%.
Besides retail fuel sales, Vivo has a lubricants and commercial fuel division. What’s it all about?
CC: In the commercial business, 75% of it is what I would call core business that is recurrent: that could be mining, construction, transport, you name it. The other 25% is what we call business that comes and goes and is linked to tenders. We had a good year so far because we captured aviation and marine business. It’s grown by 14% year on year. And the cycles are what they are.
You have a defined capex plan for the next five years, but you also have quite a generous dividend payout plan, which is one-third of your net income. Can the two happily co-exist?
CC: Yes. The nice part of our business is that we have a very strong cash engine. Our retail business is basically cash and carry and we have negative working capital, so that together with the money we make allows us to self-fund all our capex, pay our debt and dividends.
There are very few companies across the continent that have that cash-generative aspect on their side.