The $1.2 billion acquisition of convenience store operator OTR in 2024 coincided with the end of Viva’s post-covid share price tear. Faltering retail margins and a leveraged balance sheet have investors questioning the purchase, and fears around the threat from electric vehicles are rekindled.

Why it matters: Viva’s share price has plunged, and we have looked deeper into the electric vehicle threat and further into implications of recent fuel margin headwinds. We now project retail fuel demand to flatline for 10 years before gradual decades-long decline after, a more hawkish view.

  • However, we still expect successful conversion of Viva’s Express stores to the OTR format, with broader integration benefits, to support stronger medium-term sales growth and margins. We assume these drive 65% improvement in retail fuel margin to 7.5 cents per liter.
  • Our near-term earnings forecasts are little changed with the implications of our recent reassessment weighing more on the longer-term. Viva’s prospective dividend profile remains a key attraction with a forecast 2026 yield of 8%, or 17 cents per share, assuming a 65% payout ratio.

The bottom line: We reduce our fair value for no-moat Viva by 17% to $2.50. We still forecast a five-year EBITDA compound annual growth rate of 11% to $1.3 billion by 2029. We expect steady internal combustion engine vehicle numbers for at least a decade. Replacement of ICE vehicles by EVs will be slow.

  • Viva shares are undervalued based on international peer multiples and relative to historical multiples. We think the valuation gap should close after successful demonstration of improved returns upon shop conversion to OTR format.
  • Anticipated milestones include completion of at least 40 OTR store conversions by the end of 2025 and 100 per year from 2026. For more details, please see our June 2025 Stock Pitch ‘Viva Energy: Value Despite Electric Vehicle and Cost Headwinds.’

Value on offer despite potential headwinds

Viva Energy Group, along with Ampol, BP, and Mobil, is in a rare breed of vertically integrated Australian refined fuel supplier. The Australian downstream petroleum industry runs from sourcing, transporting and storing crude oil, refining that crude into marketable products or directly sourcing imported refined product, and then transporting refined products for sale to retail and commercial customers. Refined products are mostly used in the transport sector, including commercial and private motoring, aviation, marine, and other transport demand. The Australian market equates to about 60 billion liters of product, with road use the largest segment at over 50%, followed by aviation at 14% and industry at 12%.

Coronavirus notwithstanding, volumes in the Australian fuels market increase at close to rates in GDP, with solid increases in diesel and jet fuel consumption offsetting a slow decline in petrol. Our outlook is for comparatively steady Australian refined fuels demand growth of 1.5% per year.

Viva is Australia’s second-largest vertically integrated refined transport fuel supplier, delivering over 14.5 billion liters of refined product annually or approximately 24% of national requirement. We describe Viva as vertically integrated because it refines, supplies and markets fuel to customers. Few companies refine fuel locally with much of Australia’s refining capacity shut in recent decades, unable to compete with Asian mega-refineries. There are only four refineries remaining including Viva’s Geelong in Victoria. Geelong converts imported and locally sourced crude oil into gasoline, diesel, jet fuel, and lubricants.

These are then distributed, along with directly imported product, into the retail channel via supply channels. The Geelong refinery is one of the most complex in the country due to its greater ability to produce higher value products.

Against our relatively sanguine outlook for the refined fuels industry, there are a number of concerns. These include the potential for heightened competition, driving lower margins given the entrance of new players. Further, investing in older and far smaller refineries than Asian mega-cousins is a potential money pit.

Viva bulls say

  • Viva boasts significant refined fuel distribution, supplying around 24% of Australia’s national requirement; second only to Ampol.
  • Australia’s fuel demand continues to increase at low-single digits as population growth and rising aviation use offset increasing vehicle fuel efficiency gains.
  • While not sufficient to warrant awarding an economic moat, Viva’s pipeline and terminal infrastructure furnish competitive advantages--notably the efficient scale with its jet fuel pipeline supplying Sydney Airport.

Viva bears say

  • As technology improves, highly fuel-efficient vehicles, electric vehicles, and other alternative fuel vehicles will further detract from retail fuel demand.
  • Environmental risks inherent to Viva Energy’s business of transporting, storing, and refining fuel expose Viva to penalties, remediation costs, and reputational damage.
  • Both retail and commercial fuel markets in Australia are intensely competitive. As competitors seek to increase market share, in the absence of an economic moat, Viva will likely need to sacrifice margin to avoid losing share.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.