Alimentation Couche-Tard Inc T.ATD

RBC

[retiredcf]

ATD.B is one of their top 30 global investment ideas for 2021 with a $55.00 target.

Investment summary: Solid performance since the pandemic was declared in CQ1/20 underscores defensive nature of the c-store industry. OP rating on ATD and thesis predicated on:

Multiple routes to future growth, with the 5-year plan calling for double-digit EBITDA growth driven equally by organic growth/M&A, versus 30%/70% historically. Positive underlying drivers remain: i) incremental synergies/reverse synergies from prior acquisitions, notably around rollout of Food at Scale beginning in C20; ii) renewed top-line momentum from a more focused, data-driven approach to merchandising/promotional strategies; iii) sharing of best practices among geographies to drive sales and optimize margin/productivity, an element that has proven extremely useful since the pandemic hit Europe earlier than North America; iv) focus on surfacing opex/scale benefits; v) increased activity on store openings, targeting 200 annually up from 100 previously. And, of course, opportunistic acquisitions, with current environment likely to surface attractive opportunities.

Solid underlying operating performance aided by global Circle K rebranding, with Food at Scale and other fresh food & coffee initiatives driving traffic, basket growth.

Industry performance in N.A. since the declaration of the pandemic reinforces defensive sector attributes. High gas margins/low fuel prices should enable ATD to offset gallon weakness related to current dislocation.

Attractive geographic diversification with >85% of GP$ outside Canada. Small, strategic acquisition in Asia is not yet meaningful to financial forecasts but establishes a platform for accelerating growth from new geography.

Real-world EV R&D lab in Norway: Sales of electric vehicles are likely to accelerate, and ATD is the only North American c-store player with a strong footprint in Norway, the global leader in EV adoption. ATD already operates >1k charging stations on their sites in addition to 2.7k chargers in homes and offices, and is gaining valuable insight into consumer behaviour/revenue opportunities associated with top-up charging.

Strong BS + FCF profile with forecasted FCF in the range of $2B to fund dividend growth, debt repayment, and acquisitions. Adjusted net debt/EBITDAR now <1.5x, well below the post-SFR peak of 3.6x, with normalized estimated balance sheet capacity in excess of US$10B.

Valuation: Midpoint of 20x/11x Q2/F23E (Oct C22E) TTM EPS/EBITDA drives our price target of $55, which supports our Outperform rating. The EBITDA multiple is consistent with the average of the five-year range, reflecting overall sector valuation trends, and supported by ongoing strong underlying performance, relatively recession-resistant business model and benefits from prior-period M&A. We believe multiples are also appropriate relative to our c-store coverage universe.

Risks to rating and price target: Unprecedented fuel demand destruction has been more than offset by margin gains so far. Margin normalization without a volume recovery would result in earnings and likely share price that are below expectations. Although c- stores provide a convenient fill-in shop, current substantial dislocation in normal daily patterns could cause sharply lower inside store traffic. Although c- stores typically are relatively recession-resistant, we note that 50% of US c-store customers have incomes of $50,000 or less, a group that could be hard-hit by a post- COVID recession if income support is lessened. We also note that with ATD’s diversified geographic footprint, the risk profile of forecasts includes multiple geographies, currencies, economic and operating environments, each of which is being impacted at differing levels by COVID-19 and oil price movements.