Alimentation Couche-Tard Inc.

Alimentation Couche-Tard Inc. (TSX: ATD.B) is a global leader in convenience and fuel retail and have a presence across 26 countries and territories, with more than 14,200 stores, of which ~10,800 offer road transportation fuel. 

Key Highlights:

• Recession-Proof Business-model: The company is a leader in the convenience store segment in Canada and holds a prominent market share across the United States, Europe and Scandinavian regions. Moreover, the group is emphasizing on inorganic growth methods across North America and European regions in order to gain market share and improve its product offerings. Notably, during the last two decades, industry inside sales within convenience sales segment reported a stable growth despite the economic cycles.              

Source: Company Presentation

• Higher profitability and Robust Cash flow conversion: The group has maintained its profitability and showed consistent improvement in its EBITDA, which is a key positive. Notably, amidst the recent economic doldrum due to pandemic, the company reported its EBITDA at USD 4 billion in 9MFY21, depicting a growth of 14.9% on y-o-y basis. Moreover, the company witnessed a solid cash flow conversion during the last few years supported by the low cost of debt and streamlined corporate structure. Notably, since 2011, the group converted more than 35% of EBITDA to free cash flow. 

Source: Company Presentations

• Issuance of Unsecured notes: On May 13, the company issued two tranches unsecured notes of USD 650 million and USD 350 million, respectively, with due dates of 2041 and 2051, respectively. These funds would be utilized to refinance the near-term debt amounting to ~USD 1 billion in July 2022.

Q3FY21 Financial Highlights:

• B announced its quarterly result, wherein the company reported a revenue of USD 13,157.5 million, lower than USD 16,604.2 million in pcp. The slide was primarily attributed to lower demand for fuel and a decline in fuel selling prices. Moreover, the disposal of US wholesale fuel business during 2020 impacted the topline.
• Operating income stood at USD 834.6 million, down from USD 868.5 million in Q3FY20. The quarter was marked by lower cost of sales (USD 10,291.8 million v/s USD 13,788.3 million in pcp), and a decline in operating, selling, administrative and general expenses (USD 1,617.8 million v/s USD 1,616.2 million in pcp).
• Net income was recorded at USD 607.5 million, v/s USD 663.9 million in pcp.
• The corporation reported cash and cash equivalents of USD 2,719.3 million, while total assets were recorded at USD 27,518.2 million.

Income Statement Highlights (Source: Company Report)

Risks:  Further breakout of COVID-19 may result in lower demand for fuel coupled with lower selling prices, which may result in a slide in income and cash flows for the group in the coming days.

Valuation Methodology (Illustrative): P/E based valuation.

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

Stock Recommendation:

In order to enhance customer experience, the company would offer extended services across stores and at fuel courts. The group is also focusing on improving operational efficiency through enhancing its network, which is expected to provide improved prospects in the coming days. Moreover, the group has marked its presence across Asia and would start its operations in the coming days, which is a key positive. 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 North West Company Inc, Metro Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 43.49 on May 17, 2021.

One-Year Price Chart (as on May 17, 2021). Source: Refinitiv (Thomson Reuters)

Restaurant Brands International Inc.

Restaurant Brands International Inc. (TSX: QSR) is one of the world’s largest quick service restaurant companies with approximately USD 32 billion in annual system-wide sales and 27,000 restaurants in more than 100 countries and U.S. territories. RBI owns three of the world’s most prominent and iconic quick service restaurant brands – TIM HORTONS, BURGER KING, and POPEYES. 

Key highlights

• Popeyes brand is on expansion: Recently, the group's Popeyes brand and India's Jubilant Foodworks Limited have announced ambitious new plans to build and open hundreds of Popeyes restaurants across India, Bangladesh, Nepal, and Bhutan. The group is aggressively growing the brand, with plans to open hundreds of restaurants in the United Kingdom in the coming years and in Mexico beginning in 2021.

• Restaurants remained open at a healthy rate: At the end of March 2021, 95% of the group’s restaurants were open worldwide, including substantially all its restaurants in North America and Asia Pacific and approximately 92% and 84% of restaurants in Europe, Middle East and Africa and Latin America, respectively. With the increase in reopening of the stores, the company would likely to generate ample cash flows.

• Increase in free cash flows: The company’s robust operations lead it in achieving higher cash from operating activities, which stood at USD 266 million in the reported period. It also clocked higher free cash flows of USD 251 million in the reported period, highest for Q1, in the last three years.

Source: Company

• Steady dividend distribution:The group continues with the track record of dividend distribution. The company recently declared a dividend of USD 0.53 per unit payable on July 7, 2021. Moreover, at the last closing price, the stock was offering a dividend yield of 3.195%, which is decent considering the current interest rate scenario.

• Ample liquidity:As of March 31, 2020, the group had cash and cash equivalents of USD 1,563 million, working capital of USD 739 million and borrowing availability of USD 998 million under its senior secured revolving credit facility. With the current liquidity, the company would be able to fund its short-term capital requirements.

Financial overview of Q1 2021

• In Q1 2021, the company posted a revenue of USD 1,260 million, against USD 1,225 million in the previous corresponding period. The rise in revenue was primarily driven by a favorable FX Impact of USD 24 million.
• Income from operations stood at USD 442 million, compared to USD 389 million in Q1 2020. The increase in operating income was primarily due to higher income, partially offset by higher advertising expenses.
• The company reported net income attributable to shareholders at USD 179 million in the reported quarter, compared to USD 144 million in pcp. The rise in net income was primarily due to the reasons discussed above. 

Risks associated with investment

The company’s results can be adversely affected by unforeseen events, such as adverse weather conditions, natural disasters, pandemics such as the COVID-19 pandemic, or other catastrophic events. The further breakout of Covid-19 might lead to social distancing measures and store closures, which could lead to lower royalty income for the company. 

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

The COVID-19 global pandemic appeared to influence the group's performance this quarter. The group did, however, manage to make strides in reopening shops that had been partially closed, which would help to boost sales. The corporation is continuing to make strides toward its long-term goals, which include expanding the Popeyes name. The company is rapidly expanding the brand, with plans to open hundreds of restaurants in the United Kingdom and Mexico in 2021, as well as a hundred in the Indian Subcontinent, which would help them generate more cash in the immediate future. Therefore, based on the above rationale and valuation done, we recommend a "Buy" rating on the stock at the closing price of CAD 81.47 as on May 17, 2021. We have considered Domino's Pizza Inc, Mcdonald's Corp, Starbucks Corp, etc. as the peer group for the comparison.

One-Year Price Chart (as on May 17, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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