Alimentation Couche-Tard Inc.

Alimentation Couche-Tard Inc (TSX: ATD.B) operates a network of convenience stores across North America, Ireland, Scandinavia, Poland, the Baltics, and Russia. The group primarily generates its revenue through the sale of tobacco products, groceries, beverages, fresh food, quick service restaurants, car wash services, other retail products and services, road transportation fuel, stationary energy, marine fuel, and chemicals. 

Key Highlights:

• Increase in Dividend Payment: The group distributed higher dividend to its shareholders amidst the ongoing economic jolt, which indicates stable cash flow generation. Notably, during 9MFY21, the group distributed a total cash dividend of USD 193 million, increased from USD 160.1 million in 9MFY20. The group reported an increase in its dividend payment by more than 8-fold since 2011, reflecting ~27% CAGR.

• Reduction in total debt: The group showed prudent capital management amidst turbulent times and has reduced its total borrowing to USD 6,253 million in Q3FY21, from USD 7,516 million in Q4FY20. A decline in total debt indicates higher financial flexibility and is a key positive as it leads to lower financial expenses.
  

• Resilient Business model with ample room for growth: The company operates through convenience stores, and the industry offered consistent demand amidst several economic hiccups. Moreover, the company has a market share of ~5% within the US, and due to the fragmented nature of the sector, the opportunity for expansion through acquisition remains high. The group has already expanded its network across Asia through the acquisition of Convenience Retail Asia Limited (Hong-Kong based) in December 2020. The demographic distribution across Asia is likely to favor the company’s business in the coming days.

Q3FY21 Financial Highlights:

• B announced its third-quarter result, wherein the group posted revenue of USD 13,157.5 million, lower than USD 16,604.2 million in the previous corresponding period (pcp). The slide was primarily attributed to lower demand for fuel and a decline in fuel selling prices. Moreover, the disposal of the US wholesale fuel business during 2020 impacted the topline.
• Operating income stood at USD 834.6 million, marginally lower than USD 868.5 million in Q3FY20. The group inculcated operational efficiencies during the quarter and reported a significant decline in cost of sales. Meanwhile, operating, selling, administrative and general expenses stood at par with the previous corresponding period.
• The corporation reported its net income at USD 607.5 million, compared to USD 663.9 million in pcp.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks:  Due to lower demand for fuel coupled with lower selling prices, the group recorded a decline in income and cash flows. Continuation of such a trend would affect the financial performance of the group. Moreover, a rise in wage rate and other input costs might dampen the group’s profitability and margins.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The operation of ATD.B is resilient in nature, while the company has a significant footprint across the globe, which offers diversified revenue base. The group has reported an impressive EBITDA-to-FCF conversion rate of more than ~35% since 2011. Notably, free cash flow grew at 20% CAGR from 2011 to 2020, which is encouraging.   Moreover, due to several cost control measures, the company reported stable margins, despite the ongoing sluggish economic growth. Operating margin and net margin stood at 6.3% and 4.6%, respectively in Q3FY21, higher than the industry median of 3.2% and 1.9%, respectively. We have valued the stock using the P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms) upside. For the said purposes, we have considered peers like Metro Inc, Caseys General Stores Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 43.76 on June 22, 2021.

One-Year Technical Price Chart (as on June 22, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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