Parkland Corporation. (TSX: PKI) is a Canada-based company, that distributes and markets fuels and lubricants. Refined fuels and other petroleum products are among the variety of offerings the company delivers to motorists, businesses, consumers, and wholesalers in the United States and Canada. 

Key Highlights:

• Decline in liquidity: During Q1FY22, the company stated the cash used in the operating activities of CAD 48 million against the cash flows from the operating activities of CAD 264 million in pcp. The decline in the cash flows from operations indicates that the company might face serious concerns to manage its day-to-day business operations smoothly.

• Industry lagging profitability margins: In Q1FY22, the group reported increased revenues, which were offset by the increase in overall expenses, leading to the deteriorating profit margins when compared against the industry median, represented below.

Source: Refinitiv, Analysis by Kalkine Group

• In-efficient debt management: During Q1FY22, the group reported higher debt levels on account of an increase in the working capital requirement because of the rise in commodity prices, and acquisitions, which led to the pressure on its balance sheet. The inefficiency of the company in managing its debt is presented below when compared against the industry median on the various debt metrics and ratios.

Source: Refinitiv, Analysis by Kalkine Group

• Longer cash conversion cycle: The company is inefficient in converting the inventory into cash, and in Q1FY22 the group is taking 39.3 days to convert its inventory into cash, which is higher than the industry median of 2.2 days. This is a serious concern for the company as the increasing number of days is slowing down the cash rotation.

Valuation Methodology (Illustrative): Price/ Cash-flow based

Analysis by Kalkine Group

Stock Recommendation:

The group reported increased expenses, particularly the cost of purchases which rose to CAD 6.563 million in Q1FY22 as compared to CAD 3,523 million in pcp, and operating costs which climbed to CAD 337 million in the reported period (Q1FY22) vs CAD 244 million in Q1FY21, completely offsetting the impact of higher revenues. Further, the group reported higher debt which lead to the increase in the leverage ratio of 3.5x in Q1FY22 as compared to the leverage ratio of 3.3x in the previous quarter (Q4FY21), another key negative.  On the valuation front, the stock is measured on the Price/ Cash flow-based relative valuation multiple, and the stock is currently offered at 5.9x which is higher than the industry (energy) median of 4.5x, stating the stock is still overvalued. We have considered PBF Energy Inc., CVR Energy Inc., etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock of PKI at the last closing price of CAD 36.18 on June 13, 2022.

One-Year Technical Price Chart (as of June 13, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

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