Alimentation Couche-Tard Inc.

Alimentation Couche-Tard Inc (TSX: ATD.B) operates a network of convenience stores across North America, Ireland, Scandinavia, Poland, the Baltics, and Russia. The group primarily generates its revenue through the sale of tobacco products, groceries, beverages, fresh food, quick service restaurants, car wash services, other retail products and services, road transportation fuel, stationary energy, marine fuel, and chemicals. 

Key Updates:

• Impressive margins: The company is commanding higher margins against an industry, which indicates improved operational efficiencies. Notably, in Q1FY22, the company reported EBITDA margin and operating margin of 9.7% and 7.7%, respectively, higher than the industry median of 5.5% and 3.6%, respectively. The corporation also recorded a higher net margin at 5.6% compared to an industry median of 2.1%, in a same period.

• Improved liquidity: The company reported its quick ratio and current ratio at 1.13x and 1.48x, respectively, in Q1FY22, better than the industry median of 0.71x and 1.28x, respectively. The above indicates better working capital management and illustrates that the company is able to fund its short-term liability through its current assets.

• Better debt-protection metrics: At the end of Q1FY22, the company reported net debt to EBITDA of 4.8x, as compared to the industry median of 7.4x. A lower ratio indicates higher debt protection ability of the firm.

Q1FY22 Financial Highlights:

• B announced its first-quarter result, wherein the group posted revenue of USD 13,578.9 million, higher than USD 9,709.8 million in the previous corresponding period (pcp). The increase was driven by strong growth from all the operating segments. Additionally, the positive impact from the acquisition also supported the company’s growth.
• Operating income stood at USD 1,044.9 million, marginally lower than USD 1,059.3 million in Q1FY21. Cost of sales increased to USD 10,978.9, versus USD 7,221.2 million in pcp. On the other hand, operating, selling, administrative and general expenses was higher at USD 1,278.1 million v/s USD 1,148.6 million in pcp.
• The corporation reported its net income at USD 764.4 million, compared to USD 777.1 million in pcp. The slide was primarily due to higher input costs, partially offset by lower net financial expenses (USD 74.3 million v/s USD 88 million in pcp).

Q1FY22 Income Statement Highlights (Source: Company Report)

Risks:  Due to lower demand for fuel coupled with lower selling prices, the group might witness a decline in income and cash flows. Moreover, a rise in wage rate and other input costs might dampen the group’s profitability and margins.

Valuation Methodology (Illustrative): Price to Earnings  

Stock Recommendation:

At the end of Q1FY22, the company reported ample liquidity of USD 2.5 billion under credit facility, which is sufficient to support its working capital and capital expenditure. The company also reported a higher cash balance of USD 3,443.2 million in Q1FY22, higher than USD 3,015.8 million in FY21. A higher cash balance denotes higher liquidity position of the company.

 We have valued the stock using the P/E based relative valuation method and have arrived at a single-digit upside (in percentage terms) upside. For the said purposes, we have considered peers like Metro Inc, Loblaw Companies Ltd etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of ATD.B at the last traded price of CAD 50.96 on November 16, 2021.

One-Year Technical Price Chart (as on November 16, 2021). Analysis by Kalkine Group 

Fortis Inc

Fortis Inc (TSX: FTS) operates as an electric and gas utility company in Canada, the United States, and the Caribbean countries.

Key Highlights

• An Income Play: FTS shares are offering a lucrative dividend yield of 3.847%, which is significantly higher amid a lower interest rate environment. Moreover, the company is carrying an investment grade credit rating and maintained consistency in dividend payment over the past decade. Also, the board has reaffirmed 6% average annual dividend growth guidance through 2025.

Dividend History. Source: REFINITIV, Analysis by Kalkine Group 

• Industry Leading Margin Profile: The company has reported industry leading margin profile in Q3FY21, with gross margin stood at ~72% vs. industry median of ~69%, EBITDA margin of 44.5% vs. 38% industry margin and Net margin broadly in line with the industry median. This reflects that the company is having competitive edge against industry peers from the margin standpoint. 
  

• Hovering above crucial short-term and long-term SMAs: On weekly price chart, FTS shares are hovering above its crucial support levels of 50-day and 200-day SMAs, a positive indicator. Moreover, recently stock has taken strong support near its 50-day SMA and moved higher. This implies that near 50-day SMA level, FTS shares have good demand zone.

Technical Price Chart (as on November 16, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Risk Associated

The company is exposed to a variety of risks ranging from lower industrial electricity demand on the back of resurgence in the COVID-19 cases, increase in operating costs on the back of increasing inflationary pressure, interest rate risk and other macro-economic risks.

Financial Highlights: Q3FY21

Source: Company filing

• During the quarter under consideration, the company’s reported revenue improved by USD 75 million to USD 2,196 million on a YoY basis, driven by higher electricity sales, primarily in Western Canada and the Caribbean region and higher flow-through costs in customer rates.
• The board has increased common share dividend by ~6% to USD 0.505 , marking 48 years of consecutive increases.
• Operating cash flow has improved from USD 686 million in Q3FY20 to USD 711 million in Q3FY21, due to higher cash earnings, largely reflecting rate base growth and new customer rates at TEP effective January 1, 2021.
• During, Q3FY21 reported net earnings attributable to common equity shareholders stood at USD 295 million for the third quarter, or USD 0.63 per common share, in line with the net earnings per common share for the same period in 2020.

Stock Recommendation

The company reported modest performance in Q3FY21 with improved topline, operating cash flow and an increased quarterly dividend. Further the company has long-term outlook remains unchanged and continues to enhance shareholder value through the execution of its capital plan. Moreover, the company is yielding higher amid a lower interest rate environment, with track record of consistent dividend payment and 48 years of consecutive dividend increase. Hence, based on the above rationale, we recommend a “Hold” rating on the “FTS” stock at the closing price of CAD 55.63 (as on November 16, 2021).

1-Year Price Chart (as on November 16, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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.