David Murray, Senior Credit Analyst for the PM Capital Enhanced Yield Fund, outlines a recent investment that we believe offers a very attractive yield for a defensive and well-managed business.
Ampol supplies fuel to cars, trucks and planes through almost 2,000 sites across Australia and runs a fuel refinery near Brisbane. It also earns a third of its revenue by selling mars bars, fresh food and other grab-and-go items from convenience stores attached to its sites.
The Enhanced Yield Fund built a position in an Ampol bond at a 5.2% yield that matures in 2025. While it’s a broad, fascinating business with lots to dig into, there are a few defining features that drive our investment decision:
Stable cashflow from selling a vital good
Australian vehicles overwhelmingly run on fuel and any transition to electric vehicles (EVs) will be gradual.
Largest fuel distributor in Australia
Profit margin is all about scale (to keep costs down) and brand (to push sales up) when selling a commodity product into a fragmented market. The brand refresh from Caltex to Ampol is largely complete and exceeding expectations.
Partnership with Woolworths
The more reasons to stop at an Ampol site, the better. Partnering with the leading supermarket chain in Australia is a great match that adds fresh food and extra brand recognition to Ampol’s network of convenient metro locations.
Petrol refining receives government subsidies, removing the downside
A government policy introduced last year awards top-up payments to Ampol’s refinery when times are tough but leaves Ampol with 100% of refinery profits when times are good. It turned a key weakness into a strength, greatly boosting our view of the company’s earnings quality.
Long-term challenges to the business model are outside our investment time frame
EVs pose an existential threat to petrol stations but it’s a story that will play out over decades. The Fund’s investment earns a great yield and matures in 2025.
Ampol’s strong balance sheet, market-leading position and stable cash flow make it exactly the kind of business we look for and a welcome addition to the Fund.
Image source: Woolworths.com.au
This Insight is issued by PM Capital Limited ABN 69 083 644 731 AFSL 230222 as responsible entity for the PM Capital Enhanced Yield Fund (ARSN 099 581 558, the ‘Fund’). It contains summary information only to provide an insight into how we make our investment decisions. This information does not constitute advice or a recommendation, and is subject to change without notice. It does not take into account the objectives, financial situation or needs of any investor which should be considered before investing. Investors should consider the Target Market Determinations and the current Product Disclosure Statement (which are available from us), and obtain their own financial advice, prior to making an investment. The PDS explains how the Fund’s Net Asset Value is calculated. Past performance is not a reliable guide to future performance and the capital and income of any investment may go down as well as up.
