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 Updates:

• Strong EBITDA to Free cash flow conversion: In the recent past, the company showed consistent improvement in its EBITDA, which is a key positive. Moreover, the company reported a robust cash flow conversion during the last few years. Notably, since 2011, the group converted more than 35% of EBITDA to free cash flow, which is noteworthy.

Source: Company Presentations

• Stable Macro Factors: The US fuel and convenience industry have remained stable in the last two decades, which reduces the company’s risk profile. The company has a market share of roughly 5% within the US, while we believe, due to the fragmented market structure, the company has ample scope of expansion through both organic growth and acquisitions. Moreover, the company is focusing on improving its efficiency by better product offerings to its customers and through offering flexible supply terms.

Source: Company Presentation

• Increase in Dividend distribution amidst economic crisis: During FY11 to 9MFY21, the company has reported consistent growth in dividend distribution, backed up by stable cash flow generation. The company reported CAGR of 26.6% from FY11 to 9MFY21 in dividend per share. For 9MFY21, the group paid a cash dividend of USD 193 million, higher than USD 160.1 million in the previous corresponding period (pcp).                        

Source: Company Presentation

• Exit Strategy to Strengthen operations: To streamline its operations, the company announced the sale of its 49 sites in Oklahoma to Casey's General Stores Inc. at a price consideration of USD 39 million. Moreover, the group opted to exit from another 306 sites across North American network to maintain its strategic objective. 

Q3FY21 Financial Highlights:

• B announced its quarterly result, wherein the group reported revenue of USD 13,157.5 million, declined 20.8% from Q3FY20. The slide was primarily attributed to lower demand for fuel coupled with decline in fuel selling prices and from the disposal of US wholesale fuel business during 2020.
• Adjusted EBITDA was recorded at USD 1,266.7 million, higher than USD 1,207.1 million in pcp. The improvement was supported by an improved gross margin from the road transportation fuel segment, coupled with improved cost efficiency measures.
• Net income was recorded at USD 607.5 million, as compared to USD 663.9 million in pcp.

Q3FY21 Income Statement highlights (Source: Company Reports)

Risks:  Due to lower demand for fuel coupled with lower selling prices, the group might witness a slide in income and cash flows 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:

The company reported low cost of debt and reported a high conversion of EBITDA to its bottom-line. Moreover, the company has reduced its interest-bearing debt to USD 9,561.7 million in Q3FY21, from USD 10,379.3 million in FY20, which is a key positive.  Moreover, the company’s strategy to streamline its operations by selling its less profitable branches and enhancing its presence across the higher prospective areas is likely support the upcoming performance. We have valued the stock using the P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Sysco Corp, George Weston Ltd etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 41.97 on April 19, 2021.

One-Year Price Chart (as on April 19, 2021). Source: Refinitiv (Thomson Reuters)

Atco Ltd

Atco Ltd. (TSX: ACO.X) is a Canadian holding company that offers gas, electric, and infrastructure solutions, while the company’s primary segments include electricity generation, transmission, and distribution.

Key Highlights:

• Strong Dividend Growth: Over the years, the company reported consistent growth in its dividend payment, backed by resilient cash flows. The company’s operation is buoyant in nature, as it caters to the utility segment. The stock carries a lucrative dividend yield of ~4.2%, which is decent considering the current interest rate scenario.                              

Source: Company Presentation

• Better than Industry-margins: The company reported strong operating margins during FY20, supported by improved operational efficiency. In FY20, EBITDA margin and Operating margin stood at 45.1% and 27.1%, respectively, higher than the industry median of 37.0% and 22.4%, respectively. Net margin was recorded at 12.6%, higher than the industry median of 10.8%. 

Source: Refinitiv (Thomson Reuters)

• Strong Liquidity and Convenient Debt maturity: The company has strong liquidity and unused credit facility of CAD 2,529 million, which seems sufficient to withstand any adverse circumstances. Moreover, the group has prudent capital management and has manageable debt maturity in the coming years.

Source: Company Presentation

• Result Update: The company would disclose its first quarter FY21 result on April 29, 2021.

FY20 Financial Highlights:

• X announced its full-year result, wherein the company posted revenues of CAD 3,944 million, as compared to CAD 4,706 million in FY19.
• Salaries and wage benefits, Plant and equipment maintenance stood lower than the previous year, while Energy transmission and transportation and Other costs were higher than FY19.
• Operating profit stood at CAD 1,070 million, lower than CAD 1,557 million in FY19, due to lower income, partially offset by the lower cost (CAD 2,923 million v/s CAD 3,362 million in FY19).
• Earnings for the period stood at CAD 497 million, stood significantly lower than CAD 1,007 million in FY19.

FY20 Income Statement Highlights (Source: Company Report)

Risks:  The company’s operations might be hindered due to rise in maintenance and increase in energy transmission and transportation expenses. Moreover, the group derives majority of its revenue from the regulatory segments; hence, any regulatory change would affect the performance.

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

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

Stock Recommendation:

In the recent past, the company has emphasized on enhancing its presence across the renewable energy segment, which is impressive considering the current demand dynamics of the sector. In FY20, the company derived 24% and 1% of its revenue from the Hydro and Solar energy segments, respectively.                                   

Source: Company Report

Going forward, the company would optimize its energy infrastructure assets and would likely to add new growth platforms for catering the changing the electricity sector dynamics, which is encouraging. We have valued the stock using the P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). We have considered Fortis Inc, Canadian Utilities Ltd and Capital Power Corp etc., as a peer group for the comparison. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 42.480 on April 19, 2021.

One-Year Price Chart (as on April 19, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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