New Rating!!!!! GLTALongsParkland Corp. (PKI-T) C$30.50 Strong CDA Fuel Margin Expected to Deliver Modest Consensus Beat
Event Parkland reports Q4/22 results March 2 after markets close. We now forecast adjusted EBITDA of $454mm (up from $442mm previously on slightly higher refinery profits), a 59% y/y increase on an apples-to-apples basis (i.e., excluding SOL NCI). Consensus is currently $447mm (range: $430mm-$461mm). Impact: NEUTRAL
Excluding the refinery, we forecast adjusted EBITDA to increase 20% y/y from acquisitions completed over the past year, higher fuel margins, and higher nonfuel profits across all marketing divisions. Partly offsetting this is lower same-store retail volumes.
Illicit tobacco is expected to keep c-store SSSG negative for one more quarter, though SSSG ex-tobacco is forecast at +4%, aided by benefits from the company's loyalty program. Canada retail fuel SSVG is expected to be -1%, leaving samestore volumes 11% below pre-pandemic levels. International and U.S. total volumes are expected to rise y/y, though both benefit from acquisitions, and it is difficult to isolate the organic growth.
We expect Refinery EBITDA of $132mm vs. $16mm LY. Refinery utilization was lower last year when it underwent a mini-turnaround affecting part of the quarter and felt the effects of flooding in B.C. The high crack spreads seen this quarter should be offset by a lower capture rate as compliance and natural gas costs remain high (boosting crack spreads as well as costs).
The record quarterly earnings should reduce pro forma leverage to 3.4x, from 3.5x in Q3/22, with scaled-back growth capex, declining commodity prices, and asset sales expected to push it below 3.1x by YE2023.
TD Investment Conclusion The extreme commodity-price volatility in 2022 underscored Parkland's greater earnings vulnerability during periods of large commodity price moves, which we believe will prevent PKI shares — currently trading at 6.5x our 2023E EBITDA (excluding the Q1/23 refinery turnaround) — from returning to their historical average of 8.3x EBITDA for the foreseeable future. That said, the steps management is taking to decrease earnings sensitivity to commodity price swings, combined with 16%/19% FCF yield in 2023E/2024E, should reduce leverage to below 3.1x by YE2023 and allow the shares to trade closer to our ~7x target valuation multiple
Recommendation: BUY
Risk: MEDIUM
12-Month Target Price: C$39.00
12-Month Dividend (Est.): C$1.32
12-Month Total Return: 32.2%