August 31, 2022
Alimentation Couche-Tard Inc.
Hugging the K-urves: On track to exceed F23 organic EBITDA target
Our view: ATD is on track to exceed its F23 $5.1B EBITDA target ex- M&A as rising costs likely sustain fuel margins above pre-pandemic levels. 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, we think current valuation presents a compelling opportunity. Reiterating Outperform rating and $79 PT.
Key points:
Fuel margin step-up representative of ATD scale and procurement initiatives and higher industry-wide operating costs. Our revised model published yesterday post-release has $5.4B E EBITDA in F23 ex-M&A (6% ahead of target) rising to $5.6B in F24, predicated on US fuel margins in the high-30¢/gallon range vs LTM average 43¢/g, and US fuel gallons remaining 10-15% below pre-COVID levels. Maintaining fuels margins stable with LTM would add 8% to F24E EBITDA (Ex 1), all else equal.
Our call on fuel margins at significantly higher levels than pre-pandemic (24¢/g average to LTM Q3/F20) is based on notable observations, both at the industry level: i) MSD structural demand destruction due to new work paradigm, ii) elevated, albeit normalizing fuel prices driving credit card fees, iii) opex inflation, and specific to ATD: i) procurement initiatives, notably the JV with Musket, the benefits of which amplify in times of price volatility, ii) gross profit benefit of Circle K rebranding.
Key message: ATD is extremely well positioned relative to the industry no matter the operating environment. While a rapid de-escalation of global turmoil, a radical return to pre-COVID consumer behaviour, and a swift normalization of inflation could tame industry margins, current evidence appears to suggest otherwise, at least in the near to medium- term. Importantly, shifting our outlook toward more moderate margins would conceivably also include better volumes, lower operating costs and improving demand for higher-margin premium fuels.
Management tone on M&A appears more constructive than prior quarter. Management noted signs of modest acceleration in US deal flow recently, with rising rates and the likelihood of a recession contributing to a more constructive environment for both talks and valuations. In lieu of M&A, our model makes productive use of estimated BS capacity >$15B by incorporating NCIB of 10% of shares O/S through the end of F24, contributing ~4% to our F24E EPS. Notable situations of size include the potential sale of the Petro-Canada network and unconfirmed reports thatATD and EG Group are in talks.
Valuation and outlook attractive. With accelerating inflation and rising rates, we recommend investors gravitate toward staples/staple-like names that perform across cycles. ATD included in RBC Global Top 30.