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 in achieving regional growth ambitions.

• Lowered 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 11 October 2020, compared to USD 7.7 billion as on 26 April 2020, due to the repayment of its term revolving credit.

• Ample liquidity:The company had approximately USD 2.5 billion available under its operating credit facility; simultaneously, it had USD 3.5 billion in cash and cash equivalent. The current liquidity position seems sufficient to meet the near-term requirement. 

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  

Since COVID-19 directly impacted the Company in the first half of Fiscal Year, 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 is likely to increase. 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 achieve its regional growth ambitions. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing price of CAD 42.97 on January 6, 2021. We have considered Empire Company Ltd, Loblaw Companies Ltd, and Metro Inc, etc. as the peer group for comparison purpose.

Source: Refinitiv (Thomson Reuters)

Canadian Tire Corporation Limited

Canadian Tire Corporation Limited (TSX: CTC.A) is a Canada-based company, which operates through a range of businesses. The Company's operating segments include the Retail segment, the CT REIT segment, and the Financial Services segment. The retail segment is a significant contributor to the group's profile.

Key highlights

• Focusing on eCommerce segment:As the stores were closed and consumers took sheltering at home during the pandemic restrictions, they naturally turned to E-Commerce. The company continued to step up its digital and eCommerce forces across all banners. The eCommerce channel continued to see increased customer demand in the quarter as the sales reached CAD1 billion on YTD, increased by CAD700 million, compared to 2019.
• eCommerce sales grew 132% in the quarter, led by 178% growth at CTR
• eCommerce penetration rates more than doubled as compared to 2019 levels.
• Digital traffic increased 40% across all banners.

• Focus on improving operational efficiency:The Company is continuously focusing on executing prudent steps to achieve operational efficiency and remains committed to deliver its target of over CAD 200 million in annualized savings by 2022. Furthermore, this would augur well for more healthy margins and future cash flows.

• Strong liquidity position:The group continues its focus on ensuring a strong cash position and financial flexibility. The Company ended the quarter with CAD 1.7 billion in cash and marketable securities, along with a cumulative credit facility of more than CAD 5 billion. Current liquidity position seems sufficient to meet the near-term requirement.

Financial overview of Q3 2020

Source: Company

• With strong in-store and eCommerce performance In Q3 2020, the Company reported an increase of 9.6% in consolidated revenue to CAD 3.99 billion compared to CAD 3.64 billion in the previous corresponding period. Excluding Petroleum, consolidated revenue increased by 15.3% in the reported quarter.

• The group’s consolidated retail sales increased CAD 510.1 million or 13.1% in Q3 2020. Excluding Petroleum, consolidated retail sales were up CAD 635 million or 19.1% compared to the previous corresponding period. 

• In Q3 2020, the gross margin rate stood constant at 33.8% compared to the previous corresponding period. 

• The Company posted Net income attributable to shareholders of CAD 296.3 million, increased by 41.5% in Q3 2020 as compared to CAD 197.2 million in Q3 2019, primarily due to increase in revenue and decrease in finance cost by 16%. 

Risks associated with investment

The performance of the company’s business is prone to several risks which could affect income and liquidity. Risks related to resource supply, food processing, suppliers, customers, competition are beyond management control. 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 Earnings

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

Stock recommendation

Since COVID-19 directly impacted the company in the first half of 2020, we believe that the restrictions imposed are cooling down slowly and steadily. As the Company falls into the retail segment, which requires footfalls to survive, we expect that the people's participation would improve further as the government took some palliative measures. The Company was able to maintain the pace of growth in revenue and profitability. Further, the group continued to accelerate its digital and eCommerce efforts across all banners giving optimum results. The Company is also focusing on improving its operational efficiency and targeting an annualized saving of over CAD 200 million by 2022. Therefore, based on the above rationale and valuation, we recommend a ‘Hold’ rating at the closing price of CAD 173.12 on January 6, 2020. We have considered Metro Inc, Empire Company Ltd, Loblaw Companies Ltd etc. as the peer group.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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