No change to their two targets. GLTA

November 23, 2022
Alimentation Couche-Tard Inc.

Vroom, vroom! ATD comfortably ahead of organic F23 EBITDA target, reiterating constructive view

Our view: While LTM EBITDA $5.6B admittedly reflects record fuel margins, ATD is positioned to exceed its F23 $5.1B EBITDA target ex-M&A, driven by strong execution on key KPIs, notably procurement, fuel, and initiatives to drive inside sales. With shares trading toward the lower end of the 2015+ range, strong FCF across cycles, a clean balance sheet, and opportunity for strategic M&A, current valuation presents a compelling opportunity, in our view. Reiterating OP, $80 PT.

Key points:
Reiterating our call on fuel margins: sustainable at higher levels than pre-pandemic, underpinned by both industry factors: i) MSD structural demand destruction due to WFH, ii) higher fuel price impact on credit card fees, iii) opex inflation, and ATD factors: i) procurement initiatives to diversify supply (progress with Musket JV in the US and now Swiss-based group for Europe), and ii) Circle K conversions. While de-escalation of global turmoil, return to pre-COVID consumer behaviour, and normalization of inflation could tame industry margins, near- to medium-term evidence appears to suggest otherwise. Importantly, shifting our outlook toward more moderate margins would likely be coincident with better volumes, lower operating costs and improving demand for higher-margin premium fuels. Our model has US fuel margins settling at 38¢/g in F24, 14¢/g above pre-COVID but 8¢/g below LTM, with each CPG contributing ±$100MM EBITDA (1.8% of F24E).

Capturing share of wallet inside the box, strong NA demand continues FQ3. NA consumer backdrop constructive with healthy employment augmented by strong performance of Fresh Food, Fast (>20% category SSS where deployed). More effective data-driven promotional activity underpinning both SSS and GM%, with Merchandise Pricing/Promo element of organic strat plan currently toward the upper end of F23E EBITDA target contribution $150-$210MM. Normalized opex +8.1% Y/Y about 1⁄3 related to strategic initiatives, balance is labour/wages (improving) and inflation, notably energy in Europe (normalizing) (Ex. 4).

Strong appetite for M&A amid good deal flow. Management cautiously optimistic that tighter credit is contributing to a more constructive environment. With the company on track to exceed the organic growth component of its Double Again plan, traction on M&A could be a key catalyst for the stock. In lieu of M&A, our model makes productive use of estimated BS capacity >$15B by incorporating NCIB of 15% of shares O/S through the end of F25, contributing ~7% to our F25E EPS.

Valuation and outlook attractive. Against the backdrop of elevated rates and growing economic uncertainty, we favour staples/staples-like names that perform across the cycle and that enjoy stock-specific optionality. ATD included in RBC Global Top 30.