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.

• Consistent growth in EBITDA and Free cash flows:The company's resilient performance on a continuous basis reflects the financial strength as they achieved EBITDA and Free cash flows growth consistently. Since 2011, the company had converted 35% of EBITDA to free cash flows, further reflects the group's operational strength. 

Source: Company

• Increase in dividend:Despite this challenging environment, the company continued with dividend payment; this shows the group's financial strength. Recently, on December 17, 2020, the company increased the dividend distribution by 25% and paid a quarterly dividend, of CAD 0.0875 per share, payable to shareholders.

Source: Company

• Reduced long term debts: The Company managed to bring down its long-term debt by USD 1.5 billion to USD 6.2 billion as of October 11, 2020, compared to USD 7.7 billion on April 26, 2020, due to the repayment of its term revolving credit. 

Financial overview of Q2 2021 (In millions of USD)

Source: Company

• In Q2 2021, the Company reported revenues of USD 10.65 billion, decreased by 22.1%, against USD 13.67 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 2.45 billion, up by 7.2% in Q2 2021, against USD 2.31 billion in Q2 2020, primarily due to high gross margins on fuel and strong organic growth in convenience activities.

• In Q2 2021, net income stood at USD 757 million, against USD 578.6 million in the previous corresponding period primarily due to the reasons above stated.

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  

COVID-19 directly impacted the Company in the first half of Fiscal Year; however, we believe that the restriction imposed is cooling down slowly and steadily. As the Company falls into the retail segment, which requires footfalls to survive, the people's participation would increase over time. 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 launch its regional growth ambitions. Furthermore, the Company's consistent growth in EBITDA and free cash flows reflects its robust operational performance. Therefore, based on the above rationale and valuation, we have given a "Buy" rating at the closing price of CAD 39.04 on February 10, 2021. We have considered Empire Company Ltd, Loblaw Companies Ltd, Metro Inc, etc. as the peer's group for comparison.

Source: Refinitiv (Thomson Reuters)

Waste Connections Inc.

Waste Connections Inc. (TSX: WCN) is the third-largest integrated provider of traditional solid waste and recycling services in North America, which operates 86 active landfills, 124 transfer stations, and 66 recycling operations. The firm serves residential, commercial, industrial, and energy end markets.

Key highlights

• Event update: The company announced that it will report financial results for the fourth quarter of 2020 and outlook for the full year 2021 after the close of the stock market on February 17, 2021.

• Increased Adjusted free cash flow: The company managed to increase the Adjusted free cash flow to USD 284 million in Q3 2020, against USD 259 million in the previous corresponding period. This adjusted free cash flow as a % to revenue stood at 20.4%, against 18.3% in pcp. Furthermore, the company expects double-digit growth in adjusted free cash flow in 2021. 

Source: Company

• Increase in Quarterly Dividend: When most of the companies are either suspending or minimizing the dividend amount, the company has declared a 10.8% increase in the regular quarterly cash dividend on its common shares. This shows the group’s ability to generate ample cash flow.

• Strong liquidity: The company is maintaining healthy liquidity and capital resources. As of September 30, 2020, the group had USD 859.1 million of cash and equivalents and USD 1.258 billion of remaining borrowing capacity under its Credit Agreement, which matures in March 2023.

Financial overview of Q3 2020 (In thousands of USD)

Source: Company

• During Q3 2020, the company's business continued to be impacted by COVID-19, but to a lesser extent than in the prior period.

• In Q3 2020, the company reported revenue of USD 1.390 billion, compared to USD 1.412 billion in the previous corresponding period. A slight decrease in revenue was mainly due to the low performance of E&P segment due to economic disruptions and reduced service due to COVID-19.

• Operating income in the reported quarter stood at USD 230.7 million, compared to USD 236.6 million in Q3 2019. Lower revenue was the main reason behind the fall in operating income.

• Net income attributable to Waste Connections in Q3 2020 stood at USD 158.0 million, against USD 159.1 million in Q3 2019.

Risks in investment

A prolonged lockdown or any other containment measures announced by the government would result in a tepid volume from the commercial segment. As a result, the company’s performance would impact adversely.

Valuation Methodology (Illustrative): Price to Cash Flow 

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

Stock recommendation

The challenges posed by the outbreak COVID-19 on the global economy persisted through the third quarter of 2020 and continue to impact the demand for the Company’s services across the U.S. and Canada and across a variety of lines of business, including commercial collection and solid waste and exploration and production (“E&P”) waste disposal. On the flip side, the Company witnessed sequential improvement in solid waste volumes and increased commodity values drove steady results in the third quarter and provide incremental momentum from now on. Furthermore, we expect the volume of the solid waste, commercial collection and E&P will improve in the coming quarters, as most industrial and manufacturing activities are reopening gradually. At this gloomy time when most organizations are suspending or curtailing their dividend distribution, the Company increased its dividend for the quarter by 10.8% and a rise in adjusted free cash flow, reflecting the resiliency of the business. The Company also expects double-digit growth in adjusted free cash flow in 2021. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 124.98 on February 10, 2021. We have considered Clean Harbors Inc, GFL Environmental Inc, Waste Management Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

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