Stock market rally: should I buy Vivo Energy shares?

Vivo Energy has operations in Africa. Royston Roche analyses the company whether to include it in his portfolio.

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Vivo Energy (LSE: VVO) shares rose 6% on Friday following a positive trading update. The stock had fallen 25% in the past year in line with most of the energy sector. I’m taking a closer look now to see whether I want to buy the stock.

Vivo Energy shares’ market and overview

Vivo Energy is one of the leading distributors of fuels and related products in Africa. It has a footprint across 23 countries, operating under Shell and Engen brands. The company operates in three segments. The retail segment has over 2,250 service stations, mostly dealer-operated. It also offers multi-branded convenience retail and quick-service restaurant offerings. The company has entered into joint ventures with such retail partner brands to drive non-fuel revenue growth which is very positive. The retail segment contributed to 56% of 2019 adjusted EBITDA (earnings before interest, tax, depreciation, and amortisation).

The commercial segment supplies thousands of commercial customers with fuels and lubricants across the transport, infrastructure, mining, aviation, and marine sectors. In addition, it supplies liquefied petroleum gas to consumers and commercial customers. It also supplies aviation fuel, plus bunkering, for marine traders and other shipping companies. This segment contributed to 31% of 2019 adjusted EBITDA.

The company sells lubricants to commercial customers and retail customers in the countries of operation and also exports to more than 10 additional African markets. This segment contributed to 13% of 2019 adjusted EBITDA.

Looking into the management team, it has a UK governance code-compliant board of directors. As an investor, it makes me more comfortable investing in good governance companies. Another plus is that Africa has a fast-growing and young population, which should bode well for the GDP growth in the continent. That means Vivo Energy has a potentially growing market.

Vivo Energy shares’ recent trading update

The company released its trading update on 12 February 2021. The results were positive, primarily driven by the ongoing recovery in the retail segment. The return to normality from Covid-19 restrictions helped the growth in business. Full-year fuel volumes reached 9.6bn litres, a drop of 7% year-on-year. The drop is considered negligible due to the negative impact of Covid-19.

Improvement of margins in the third quarter continued through the final quarter. The management expects the group’s full-year adjusted EBITDA to be above the top end of the range of current market expectations of $331m to $354m. Due to the positive performance, the management intends to recommend the payment of a dividend of 3.8 cents per share for 2020. This equals to the declared 2019 full-year dividend. 

The company’s debt at the end of the first half of 2020 was $767m and cash of $460m. The debt-to-equity ratio was 1.01, as of 30 June 2020. I believe the liquidity position is strong for the company.

The company’s future profits depend partly on movements in the price of oil, over which it has no control. Another risk is currency fluctuations as it operates in several countries. Generally, market sentiment about investment in energy stocks has become more pessimistic due to the expectation there will be less reliance on oil in the future. The company’s first-half net income fell by 82% to $13m. So the earnings per share might come down for the year.

I would like to keep Vivo Energy shares’ on my watch list and review it after the company releases its annual report in the first week of March.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Roche has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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