From RBC November 19, 2015
Liquor Stores N.A. Ltd.
Tuck-in acquisition in New Jersey
Our view:
Liquor Stores N.A. (“LIQ”) has reached an agreement to acquire
a 51% interest in Birchfield Ventures LLC (“Birchfield”), which operates two
stores in New Jersey. The acquisition adds two highly productive locations
to LIQ's store network, and should be immediately accretive to earnings.
Reiterate $12 price target; Sector Perform rating.
Key points:
Reiterate $12 price target; Sector Perform rating
– Our price target
is based on ~10x (~10.5x previously) our 2017E EBITDA of $50.0MM
($45.7MM previously) and a higher debt amount versus prior forecasts.
Acquisition establishes footprint in New Jersey
– In line with the
company's previously stated strategy to expand its footprint in the US via
acquisitions, LIQ has acquired a 51% interest in Birchfield, which operates
two well-situated stores in New Jersey. LIQ has the option to purchase the
remaining 49% stake at a later time for "similar terms". The two acquired
locations generated sales of ~US$47.4MM (~
C$
62MM) in 2014. Given the
highly productive store locations, we believe the acquired business likely
generates a higher EBITDA margin relative to LIQ's legacy operations.
Immediately accretive, with potential for upside
– The acquisition is
expected to add ~$0.04 to full year EPS and ~$0.08 to cash flow per share.
Given LIQ's infrastructure and expertise in alcohol retailing, we believe
the company has the opportunity to help Birchfield with merchandising/
pricing strategies, which could help drive stronger contribution from these
locations over time. We note, however, that New Jersey limits license
holders to only two locations, so future growth in the state will have
to come from top-line growth and margin improvement at the acquired
stores.
Keeping an eye on the leverage
– The US$15MM (~
C$
19.5MM)
acquisition was funded with cash from the company's credit facility. The
company had undrawn credit available on this facility of ~
C$
66MM as
of early November. Given the concerns around continued weakness in
LIQ's resource-reliant markets, we expect increased investor focus on
the company's cash flow/leverage profile over the coming quarters. The
planned expenditures in support of the company's Seven Point plan
may have to be moderated if operating conditions in Alberta and Alaska
weaken meaningfully from current levels, in our view.
New locations announced
– LIQ also announced plans for two new large-
format locations in Connecticut and Massachusetts, expected to open in
2016. These two locations will serve as entry points in both markets for
LIQ, and we expect additional stores in both states over time. Per the
current alcohol retailing laws in the two states, LIQ can open 5 locations in
Massachusetts (increasing to 9 by 2020), and 3 locations in Connecticut.
https://www.rbcinsight.com/WM/ResearchViewer/1924-393888-1/1654?docType=PDF&