Statoil Fuel & Retail (SFR NO)

Date: 3/3/11

Price: 56.80 NOK with 300 mm shares out

Market Cap: 17.0 b NOK (3.1 b USD)

Net debt: 5.0 b NOK

EV: 22.0 b NOK

Volume: $7-$10 mm USD per day

Summary

SFR NO is a long because it is a cheap, defensive business at 9.6x 2012 FCF with great dynamics as it is a recent spin-off with newly incentivized management, an unlevered balance sheet that will be monetized this year, and cost cutting opportunities that will likely prove conservative.

Our 12 month price target is 76.50 NOK which is 12x 2012 FCF plus 2011 cash build. This is 35% upside. We think it is highly likely that the company will re-lever the balance sheet through a sale leaseback of real estate that will allow them to pay a 1-time special dividend of 10 NOK per share in H2 11, allowing for incremental upside to this price target and a catalyst.

Business Description

Statoil Fuel & Retail (SFR) is the dominant gas station operator in Scandinavia with 30-40% market share in Norway, Sweden, and Denmark. They have 2,300 gas stations in total. 80% of the business is Nordic region and 20% is Eastern Europe, mostly Poland and Russia, which is a growth opportunity for them (12% unlevered ROI on new stores). The majority of the business is the gas stations but <20% of the value is composed of their "special products" segment which is aviation fueling at airports and lubricant sales to mostly retail and small businesses. These are non-core businesses that are potential divestitures over time.

SFR was an IPO from Statoil, the Norwegian integrated oil company, in October 2010. Statoil still owns ~54%. While an IPO, there were several dynamics at work that make it more akin to a spin-off opportunity. Beyond a cheap stock, the balance sheet will be used to lever the equity through a sale leaseback of their terminal assets, there are cost cutting opportunities from a previously less-than-efficiently run organization, and most importantly now there are direct incentives for the management team to improve the business.

65% of gas station gross profit is from fuel sales and 35% is from the C-store. 50% of the fuel business is retail and 50% is wholesale. Diesel is 60% and gasoline is 40%. Volume trends should be flat to up LSD with pricing positive LSD for 3-5% revenue growth and HSD EBITDA growth with the help of a cost cutting program that has been laid out by management.

Details

We expect SFR to do 3.7 b NOK EBITDA in 2012 (up from 3.4 b NOK is 2010). This equates to 1.7 b of FCF which is 5.9/share. 9.6x 2012 FCF.

A stable business growing MSD/LSD bottom line with a sensible capital allocation policy should trade for at least 12x FCF which is 71 NOK. With another 5.8 NOK of cash build in 2011 our 12 month price target is 76.5 price target or 35% upside.

SFR has a 5.3% dividend yield which is a ~60% payout ratio that can increase over time as they don't have much use for the cash. We are encouraging them for a higher dividend payout ratio.

SFR is currently 1.4x levered with plenty of excess capacity given the stability of the cash flows. They own their terminal assets as well as a lot of real estate. Market checks suggest they can execute a sale leaseback to a life insurance company at ~4% implied cap rates given the long-lived nature of the assets. A 3 b share leaseback could mean a 1 time dividend of 10 NOK per share or a large share buyback (PF price target of 83/share or 50% upside).

CEO, CFO, and even the executive assistants (!) are buying stock in the open market.

Catalysts

SFR is planning an analyst day in H2 11 that will serve to get the story out more.

An announcement of a sale leaseback transaction in H2 11 will accrete value and confirm management is working to maximize equity value.

Risks

Fuel margins are the main lever of profitability for a gas station as volumes tend to be stable. Thus the main risk we see is if there is a price war like we saw in Sweden several years ago. The mitigating factor is that the market in Sweden and elsewhere has consolidated to less players with greater market share over the last 5 years. Dynamic fuel pricing has also been implemented which has helped to keep margins stable and even improving as management teams now have the ability to drill down and optimize pricing on a region by region basis.

Oil price spikes are not a material risk. SFR has only 3 days of fuel inventory because of their Statoil relationship. European fuel prices are much more expensive given high fuel taxes so the sensitivity of demand is much less than we see in the US. Also cars are more expensive in Europe so ownership is more of a high-income luxury than a staple that most American's enjoy so there is less of a low-income sensitivity to gas price dynamic than in the US.