Alimentation Couche-Tard Inc

Alimentation Couche-Tard Inc. (TSX: ATD.B) is a Canada-based retailer focusing on the convenience store industry. The Company is engaged in selling goods for immediate consumption, road transportation fuel and other products through stores and franchise operations.

Key Highlights 

• Acquired Convenience Retail Asia (BVI) Limited: The company recently acquired Convenience Retail Asia (BVI) Limited from its parent company “Circle K HK”, which operates a network of Circle K-licensed convenience stores, with 340 company-operated sites in Hong Kong and 33 franchised sites in Macau. This acquisition represents a significant milestone for Alimentation Couche–Tard as it provides a platform in Asia that would help the group launch its regional growth ambitions. 

• Rising EBITDA:  During the first three-quarters of FY2021, the company witnessed an increase in EBITDA by 14.9% to ~USD 4 billion from USD 3.4 billion, mainly on the back of organic growth of its convenience activities. This is commendable and a key positive.

Source: Company

• Lowered long term debts: The Company managed to bring down its long-term debt by USD 1.3 billion to USD 6.2 billion as of January 31, 2021, compared to USD 7.5 billion as on April 26, 2020, due to the repayment of its term revolving credit. 

• Dividend distribution:Despite this challenging environment, the company maintained its dividend payment, which reflects its financial strength. Recently, on March 17, 2021, the company declared a quarterly dividend of CAD 0.0875 per share, payable to shareholders on April 9,2021.

• Ample liquidity:The company’s cash position remains strong, with access to approximately USD 5.3 billion through its available cash and revolving unsecured operating credit facility. The current liquidity position seems sufficient to meet the near-term requirement. 

Financial Overview (Q3 FY21)

Source: Company 

• In Q3 2021 the Company reported revenues of USD 13.16 billion, decreased by 20.7%, against USD 16.60 billion in the previous corresponding period. The performance is mainly attributable to a lower average road transportation fuel selling price due to low fuel demand on the Covid-19 impact, offset by strong organic growth on merchandise and service sales.

• The Company posted a gross profit of USD 2.87 billion, up by 1.8% in Q3 2021, against USD 2.82 billion in Q3 2020, primarily due to high gross margins on fuel and strong organic growth in convenience activities.

• In Q3 2021, net income stood at USD 607.5 million, against USD 660 million in the previous corresponding period primarily due to the reasons above stated coupled with foreign exchange loss of USD 16.5 million. 

Risks associated with investment

The company's business performance is prone to several risks that affect income, liquidity, risks related to resource supply, suppliers, customers, competition, and foreign exchange exposure. The changing consumer preferences and expectations related to eCommerce, online retailing and the introduction of new technologies also features as a potential risk.

Valuation Methodology (Illustrative): Price to Cash Flow 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stok recommendation  

Since COVID-19 directly impacted the Company in the first half of the Fiscal Year; however, we believe that the performance to improve going forward as restrictions imposed are cooling down slowly and steadily. As the Company falls into the retail segment, which requires footfalls to survive, the people's participation would increase downtime. However, the business-maintained revenue and profitability despite the market disruption created by the pandemic. The recent acquisition of Convenience Retail Asia (BVI) Limited by the group represents a significant milestone. It provides a platform in Asia that would help the group to launch its regional growth ambitions. Furthermore, the Company's consistent growth in EBITDA and minimizing long term debts reflect its robust operational performance. Therefore, based on the above rationale and valuation, we suggest a "Buy" recommendation at the closing price of CAD 40.27 on March 18, 2021. We have considered Empire Company Ltd, Metro Inc, North West Company Inc, etc. as the peer group for the comparison.

1-Year Price Chart (as on March 18, 2021). Source: Refinitiv (Thomson Reuters)

Franco-Nevada Corporation

Franco-Nevada Corporation (TSX: FNV) is a gold-focused royalty and stream company which owns a portfolio of royalty, stream and working interests, covering properties at various stages, from production to early exploration, in Latin America, United States, Canada, Australia and Africa.

Key Highlights

• Higher guidance for 2021: In 2021, the company expects attributable royalty and stream sales to total 555,000 to 585,000 GEOs from its Mining assets and additional revenue of USD 115 to USD 135 million through energy assets. Furthermore, it expects to raise the production between 600,000 and 630,000 GEOs by 2025, and additional revenue of USD 150 and USD 170 million from its Energy assets.

Source: Company

• Solid operating matrix: FY2020 was a solid year for the company as it came out with robust performance across the operating matrix. The company is continuously increasing its revenue while minimizing the general expenses. As a result, it is earning healthy EBITDA margins and net income. This kind of performance is commendable.

Source: Company 

• Progressive & Sustainable dividends: Based on the Company's stable net cash position, robust operating results and the current higher gold price environment, the group declared an increase in its dividend distribution by 15.4% to USD 0.30, starting from second quarter to be paid in June.

Source: Company 

• Strong balance sheet with no debts: The company is having a strong balance sheet and sufficient liquidity to support its business objectives in the coming fiscal year. It ended FY 2020 with cumulative available capital of USD 1.9 billion with no debts on book, which is commendable. 

Financial overview

Source: Company

• Revenue in 2020 stood at USD 1.02 billion, up 20.9% from 2019 due to higher metal prices and an increase in GEOs sold. Mining revenue comprised 91.0% of total revenue in 2020, compared to 86.3% in 2019.
• On the back of higher revenue and lower cost of sales the group increased its gross profit to USD 620.4 million, against USD436.1 million in 2019.
• The group posted net income of USD 326.2 million, against USD 344.1 million in 2019, partially offset due to impairment charges worth USD 262.1 million. 

Risks associated with investment

The Company’s financial performance is mostly dependent on the price of gold, which directly affects their profitability and cash flow. Any drawdown in the gold prices would impact the group’s performance. 

Valuation Methodology (Illustrative): EV to Sales 

*Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks. 

Stock recommendation

In 2020, the challenges of the COVID-19 pandemic highlighted the diversity of the company’s portfolio. With record precious metals prices throughout the year and the recovery of energy prices in the second half of the year, the group generated record financial results. Furthermore, it expects strong growth in 2021 and over the next five years, driven by the ongoing Cobre Panama ramp-up, the two newly acquired assets and broad organic growth across the portfolio. Moreover, the group has a robust operating matrix. It is increasing its revenue while the G&A expenses are coming down on a continuous yearly basis, which is appreciable. The group also holds solid liquidity of USD 1.9 billion, with no debts on the book is a key positive. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 154.26 as on March 18, 2021. We have considered Wheaton Precious Metals Corp, Osisko Gold Royalties Ltd. as the peer group for the comparison.

1-Year Price Chart (as on March 18, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.