About: Caltex Australia Limited purchases, refines, distributes and markets petroleum products in Australia. The Company's products include petroleum, motor oil, lubricants, diesel fuel, and jet fuel. Caltex also operates convenience stores, fast food stores and service stations throughout Australia.

Why it is in the portfolio: Caltex provides investors with exposure to one of Australia’s largest transport fuel providers and fuel retailers. While not without its headwinds, relative to the rest of the market, Caltex is attractively priced and offers a reasonably attractive dividend. With over 1500 retail outlets, earnings from non-fuel sources currently make up only a small portion of earnings, however management have the opportunity to drive further growth in this part of the business through improving the retailing offering.

Fundamentals: Caltex currently trades on a relatively attractive price-to-earnings ratio of around 13x and has a relatively low level of debt profile which means it has the means to drive growth through acquisition if need be. Caltex provides a gross dividend yield of just under 4% with a payout ratio of around 50% meaning there is further scope to increase dividends.

What could go wrong: From a long-term perspective, the rise of the electric car is probably the most obvious risk to Caltex’s business but it is unlikely that this disruptive force will happen overnight, in the meantime Caltex benefits from a large retail and distribution network. In recent years Caltex’s earnings have been helped by a trend to premium fuels, if consumers become more price sensitive due to changes in Australia’s economic circumstances then it is possible that this growth driver may reverse. Caltex recently lost its bid to purchase Woolworths petrol retailing arm for which Caltex was the supplier. While this is likely to impact Caltex’s earnings, in our view this has already been reflected in the price and Caltex has made some recent acquisitions to "plug" the earnings gap. That said, this also poses another potential risk, that if Caltex aims to grow through acquisition they may over pay for assets.