Alimentation Couche-Tard Inc.

Positive Trends in U.S. Fuel Business: Alimentation Couche-Tard Inc. (TSX: ATD.B) operates a network of convenience stores across various countries. The company primarily generates income through the sale of tobacco products, groceries, beverages, fresh food, quick service restaurants, car wash services, other retail products. As on 25 May 2020, the market capitalization of the company stood at CAD36.65 billion.

Acquisition of Additional Securities of Fire & Flower Holdings Corp.: The company has recently announced that Ontario Inc., an indirect wholly-owned subsidiary of Alimentation Couche-Tard Inc. has acquired ownership and control over principal amount of USD1,960,000, 515 subscription receipts, common share purchase warrants of series A, B, and C.

Quarterly Performance (For the Period Ended 2 February 2020): For the period ended 2 February 2020, the company reported strong performance and saw impressive results from its strategic initiatives and improvements in offerings. During the quarter, total merchandise and service revenues went up by 2.6% to USD4.3 billion and same-store merchandise revenues increased by 3% in the U.S., 2.1% in Europe and 4.2% in Canada. This resulted in an increase in gross margin to 34% in the U.S., 42% in Europe while it decreased by 0.2% in Canada to 32.9%. The increase in revenue and gross margin resulted in a growth in net earnings of the shareholders to USD659.9 million from USD612.1 million in third quarter of FY19. The company continued to witness positive trends in the U.S. fuel business with steady same-store fuel volumes and hence realized strong fuel margins.

Quarterly Financial Performance (Source: Company Reports)

Impact of COVID-19: Couche-Tard moved rapidly to ensure that it benefits from the rapidly changing environment and has placed many preventive measures. During the few weeks of restrictive measures, the company saw a decline in fuel volumes. However, the fuel margins benefitted from the steep declines in crude pricing. The company, in response to the COVID-19, followed a disciplined approach to capital allocation and continue to grow value for its employees, customers, and shareholders.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company faced the crisis in a strong position from both a financial standpoint, with a solid balance sheet and well spread debt maturities. The stock of ATD.B gave a return of 4.84% in the past one month. Considering the returns in the past one month, decent financial performance, and resilience of the business amidst the global pandemic, we have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 42.33, on 26 May 2020.

ATD.B Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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