The Ampol Ltd (ASX: ALD) share price has faced a turbulent past 12 months. Formerly known as Caltex Australia, the company’s recent change to its original name Ampol has meant the fuel convenience brand has largely flown under the radar in recent weeks.

Earlier this year, the Ampol share price nudged $36 per share as the prospects of a takeover by Canadian firm Alimentation Couche-Tard Inc appeared likely. However, the double-whammy of COVID-19 and the unprecedented oversupply of oil have put pressure on this blue-chip company in recent months. This pressure led to the Ampol share price halving in value to a low of $18.32 on 23 March.

With its shares having now rebounded to around the middle of their 52-week high/low range at $26.42, here are 3 reasons I believe Ampol may be heading back to the high 30s in the near future:

Greater fuel demand

The winding down of COVID-19 lockdowns across Australia will inevitably mean more cars on the road and domestic planes in the skies. That’s a good thing for Ampol.

In his presentation to the 2020 Macquarie Conference in early May, Interim CEO Matt Halliday confirmed that retail fuel volumes had decreased by 16% in 2020 alone. At the same time, demand for jet fuel had shrunk by a staggering 80–90%. In response to these downward pressures, the company has implemented rigorous cost-cutting measures. These include a reduction of retail staff hours and executives’ compensation, and limiting its capital expenditure (capex) to below $250 million in 2020.

Despite this challenging environment and the negative implications this may have for Ampol’s short-term cash flow, the company will benefit from the easing of restrictions. In particular, it is likely that people will use a private vehicle in their daily activities rather than take public transport, especially due to the lingering health threats of COVID-19. Additionally, the impending resumption of domestic air travel will positively impact jet fuel demand. This will allow Ampol to claw back some of its recent losses.

Overall, the renewed demand for fuel compounded by easing COVID-19 restrictions may result in a short-term spike in the company’s share price, seeing Ampol’s shareholders benefit from the gains of the S&P/ASX 200 Index (ASX: XJO) more broadly.

Strong future earnings outlook  

Although FY20 will likely see Ampol underperform due to the challenging economic environment, I believe the company’s strong financial position makes it likely to outperform in FY21 and beyond.

In its 2019 annual report to shareholders, the company showcased its robust balance sheet, featuring $35 million in cash, $2.1 billion in inventories and $1.4 billion in receivables. This substantial liquidity pipeline was also supported by the paying of 83 cents per share in fully-franked dividends, representing a handy 3.13% yield to shareholders. Whilst this yield may be on the smaller side, investors may be comforted to know the company hasn’t skipped a dividend payment since 2009.

In addition to its strong balance sheet, Ampol’s proposed initial public offering (IPO) of a 49% stake in 250 of its service stations represents a significant opportunity for shareholders. By placing these sites in a real estate investment trust (REIT) and maintaining a majority interest in the sites, the company estimates that rental payments of $80–$100 million in the first year alone will notably improve returns. These rental payments, projected to be in the form of long-term lease agreements, will likely provide a consistent stream of capital to shareholders, perhaps in the form of an increased dividend.

It appears as though Ampol’s management is looking to reduce its costs and provide innovative profitability opportunities – a good sign the company is heading in the right direction.

Lingering acquisition speculation

COVID-19 and the increased volatility of oil prices derailed a cash takeover of Ampol earlier this year. However, I believe re-negotiations between the company and Alimentation Couche-Tard appear likely in the coming months.

Alimentation had previously offered $35.25 per share for the company. It also assured the market on 20 April that no material issues had been revealed throughout due diligence. Despite being the wrong time and place for a major deal like the one proposed, the Canadian buyer continues to see Ampol as a “strong strategic fit” as part of its Asia-Pacific business. Consequently, I wouldn’t be surprised if both parties looked to re-negotiate a deal in the coming 12 months. A buyout would facilitate a premium return for shareholders.

Foolish takeaway

I think the Ampol share price will experience tailwinds from an easing of lockdown restrictions and its property IPO in the coming months. The company has tightened its belt and effectively conserved capital during COVID-19. This may allow it to emerge from the pandemic relatively unscathed.

More reading

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• Top broker says this ASX stock is a better buy than Afterpay
• If the ASX 200 crashes again, which shares should you sell?
• After hitting $50, the Afterpay share price has pulled back. Is it good value?
• The ASX 200 stock hit by the Brazilian COVID-19 wave

Motley Fool contributor Toby Thomas owns shares of Caltex Australia Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Is the Ampol share price in the buy zone? appeared first on Motley Fool Australia.

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The breathtaking rally in ASX bank stocks ensured that financials were the best performing sector on the S&P/ASX 200 Index (Index:^AXJO) on Wednesday.

Adding to the “wow factor” was volume. The big surge in big bank share prices was on the back of very high turnover.

The Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price led the charge with an 8.6% rally to $17.94. Westpac Banking Corp (ASX: WBC) is close behind with an 8% rise to $17.61, while National Australia Bank Ltd. (ASX: NAB) gained 7.8% to $17.94.

The Commonwealth Bank of Australia (ASX: CBA) share price was last in line but shareholders are unlikely to complain about its 4.9% jump to $64.30.  

This buying frenzy suggests a couple of things about our market and where we might be heading.

Pent up demand for bank stocks

The first is that institutional investors who have been underweight banks may now be having a change of heart.

While it’s hard to tell who was frantically buying bank stocks today, many professional investors had shunned the sector due to worries that a wave of loan defaults from the COVID-19 pandemic would bring the sector to its knees.

But a string of better than expected economic data and updates from numerous ASX stocks exposed to discretionary spending showed things might be springing back to life as coronavirus restrictions are eased across Australia.

This is further evidence that the worst of the coronavirus fallout is behind us and the big discount on ASX bank stocks are starting to unwind.

Bank dividends on the way back up

This is why three of the big banks are outperforming CBA. These stocks were trading at around a 20% discount to book value to reflect their lower quality balance sheet relative to CBA, while the outlier was trading at around 1.5 times book value.

What I also believe is that NAB will be the only bank raising capital during this downturn and that ANZ and Westpac will resume paying dividends at their next profit results.

CBA shareholders are the lucky ones. Our largest domestic bank has a different reporting cycle and didn’t have to declare its profit and dividend during the height of the COVID-19 disaster.

This doesn’t mean it won’t lower its final dividend in August, but even if it does, I suspect it won’t be as much as the market expects.

Rotation from defensive stocks

The final observation is that investors are using defensive shares to fund their purchases of bank stocks. This includes outperformers like healthcare leader CSL Limited (ASX: CSL) and gold producers like Evolution Mining Ltd (ASX: EVN).

This trend could continue, particularly for healthcare stocks, although I think it would be a mistake to go underweight on gold stocks in this environment.

Foolish takeaway

But this isn’t to say the banks have a clear run ahead. There are questions about what happens when the government’s JobKeeper payment ends and goodwill from loan repayments and rents run out.

There are also concerns about falling house prices as property investors desert the market and structural changes that can shake the foundations of office and retail properties.

However, I think these risks are manageable unless house prices fall by substantially more than 10%, we get a big second wave of COVID-19 infections, or both.

If you have no or limited exposure to the big banks, you should be adding these stocks to your portfolio.

More reading

• 2 outstanding ASX 50 shares to buy today
• Soaring share price: Is CBA a buy?
• ASX 200 up 0.1%: Big four banks rocket, Afterpay sinks lower
• Why the NAB share price is surging higher today
• Why Afterpay, CSL, Fortescue, & Newcrest shares are dropping lower

Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, Evolution Mining Limited, National Australia Bank Limited, and Westpac Banking. Connect with me on Twitter @brenlau.

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Is now the right time to be buying ASX bank stocks? appeared first on Motley Fool Australia.

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