Alimentation Couche-Tard Inc.
Cir-K-ling Phoenix: Reiterating constructive view ahead of Investor Event
Our view: We would be buyers of ATD into the October 11 Investor Events. Our analysis indicates ATD over-delivered on organic initiatives to F23, underpinned by a meaningful step-up in fuel margins. Updated financial targets, sustainability of fuel CPG, incremental backcourt revenue and margin drivers along with related strategies to contain operating costs likely areas of focus at the event. Reiterating our constructive view and ATD as a Global 30 best idea.
Key points:
Investor event could be an important catalyst and driver of revision to earnings/investor sentiment. We expect management to highlight achievements around "double again" over F18-F23 (Exhibits 1-3). While the period was challenging for M&A, ATD over-delivered on organic initiatives with F23 EBITDA $5.8B vs organic target $5.1B.
Most notably, our analysis indicates that Couche-Tard:
• Broadly hit the mark on in-store initiatives, which were well advanced through F21, with Fresh Food, Fast in >4,800 (F23 target “close to 6,000"), and completion of localized pricing in F22. Key areas of focus: incremental 5+ years in-store EBITDA aspiration +$0.2-$0.5B underpinned by investments, FFF and the drive to “Own Thirst”, inventory management, data-driven merchandising, enhanced digital retail and automation.
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Over-delivered on fuel gross profit, generating incremental fuel GP ~ $1.6B in F23 on realized margin of 48¢/g vs a range of $0.28-$0.30 inclusive of initiatives cited at the 2021 event. Although we expect fuel margins to normalize from recent peak, the pandemic and its aftermath have clearly reset industry breakeven higher, with bottom quartile operators leaning on fuel profits to close the gap. Key areas of focus: fuel margin sustainability and opportunities for incremental contribution from internal initiatives.
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Experienced broader than expected SG&A headwinds. Assuming baseline SG&A growth of $0.6B implies $1.3B incremental SG&A reflecting M&A and heightened SG&A due to pandemic-driven accelerating costs, offset by longstanding focus on cost containment. Key area of focus: taming SG&A through efficiencies and automation.
Accelerating M&A a likely tailwind. Addition of MAPCO and TotalEnergies in F24 are a good start to the next period, with cadence and valuations of transactions normalizing in the current higher interest rate environment. With estimated BS capacity close to $10B+ PF announced deals, Couche-Tard is well positioned to fund business initiatives and network development, and seize M&A opportunities. We reiterate our conviction that any transaction would have a clear path to strong shareholder returns, and that ATD will stay true to >15% ROIC target.