The S&P/ASX 200 Index (ASX: XJO) share Viva Energy Group Ltd (ASX: VEA) suffered a painful 34% drop in February 2025 after the company announced its FY24 result. It's down another 10% in March to date.

Fund manager L1 noted that while Viva Energy's result was "broadly in line" with guidance and market expectations, the company's FY25 first-half guidance was "below market expectations," driven by slow convenience sales growth, an ongoing sharp decline in tobacco sales, and declining retail fuel margins.

Viva Energy describes itself as a leading convenience retailer, commercial services provider, and energy infrastructure business. It operates almost 900 service stations across Australia and supplies fuels and lubricants to a total network of nearly 1,500 service stations. It also operates the Geelong refinery in Victoria and bulk fuels, aviation, bitumen, marine, chemicals, polymers, and lubricants businesses.

Why is the ASX 200 share an opportunity?

The fund manager noted that despite the market's disappointing response to the guidance, L1 believes performance in the second half should "improve significantly."

Viva Energy could benefit from several things, according to the fund manager.

First, Viva Energy is acquiring its remaining interest in the Liberty convenience business.

Second, "substantial synergies" exist from combining the Coles Express and OTR Group businesses.  

Third, L1 noted Viva Energy is working on a $50 million cost-out program.

Finally, there's the potential for a recovery to more normal fuel retail margins.

The fund manager said the acquired OTR business remains a proven, high-quality fuel and convenience retail offering.

L1 believes there is "significant earnings upside" potential from rolling out OTR across the well-located but historically "under-invested" Coles Express sites. The initial set of conversions is "performing well".

The fund manager noted that the ASX 200 share's management has retained the $500 million operating profit (EBITDA) target for the convenience and mobility business, compared to $231 million in EBITDA in 2024.

On top of that, L1 noted that Viva's commercial business is "performing well", with $470 million of EBITDA in 2024, while refining margins are trending higher after a low in 2024 when the business made a minimal EBITDA contribution.

The fund manager concluded about the business:

Viva trades at a substantial discount to its global peers, despite the significant medium-term earnings upside potential in the business.