Parkland Corporation (TSX: PKI) distributes and markets fuels and lubricants, which are delivered to motorists, businesses, consumers, and wholesalers in the United States and Canada.

Why Investor’s Should Book Profit?

• Lower profit margins: PKI reported weak profitability margins during Q2FY21 as compared to the industry median. This indicates lower operational efficiency, which remains a key concern for the company. Notably, gross margin and EBITDA margin stood at 14.6% and 7.4%, respectively, in Q2FY21, lower than the industry median of 54.1% and 43.2%, respectively. The company also registered a negative net margin of 1% in Q2FY21, versus the industry median of 3.8%.
• Highly Leveraged balance-sheet: The company has a higher debt level as compared to the industry median, which would result in lower financial flexibility. Notably, at the end of Q2FY21, the group reported its debt to equity of 2.45x, which is significantly higher than the industry median of 0.67x. Moreover, long-term debt to total capital stood at 65.8% in Q2FY21, as compared to the industry median of 29.3%. The above indicates that the company is highly leveraged when compared to its peers.
• Increasing uncertainties: Due to the rise in Delta variant cases, several countries might opt for containment measures in order to reduce the impact, which would subsequently lead to fluctuations in commodity prices. The above might result in a lower realization price and might hinder the cash flow of the firm.
• Trading near the upper band of the Bollinger Band: On the daily price chart, the stock of PKI rallied from its recent lows of CAD 34 and has moved close to the upper band of the Bollinger band. The above indicates that the stock is perhaps overbought and due for a price correction or a consolidation.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): Price to Cash flow

Stock Recommendation:

In Q2FY21, despite a rise in revenue, the company reported a net loss of CAD 50 million (v/s net earnings of CAD 31 million in pcp) due to a rise in input costs. Continuation of the above trend might lead to increase in accumulated deficit and would hinder the overall financial flexibility. Moreover, the company reported a negative return on equity (ROE) of 3% in Q2FY21, as compared to the industry median of 1.6%. We have valued the stock using the P/CF-based relative valuation method and have arrived at a double-digit (in percentage terms) downside. Hence, Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock at the closing price of CAD 37.39 on October 20, 2021.

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

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