Rolling our 16x-17x P/E valuation out another quarter (applying it to our lower forecasts) and adding in the Total acquisition boosts our target price to C$74.00 (from C$71.00), given the weaker Canadian dollar.
Impact: MIXED
We discussed most reasons for the earnings miss in the last note, some of which we believe are temporary. There were also a few positives, particularly surrounding SSS, which beat consensus in all geographies, led by the Fresh Food Fast program delivering 23% SSSG. This program is now in >4,500 sites globally (46% of total corporate stores) and profit growth is accelerating (it should only increase as temporarily elevated promotion and sampling is pared back and shrink declines).
The announced acquisition of 2,193 TotalEnergies sites (note) is evidence that meaningful deals within ATD's core c-store business remain. Kum & Go (>430 U.S. sites valued at ~$2bln) is another chain that is currently exploring a sale and management pointed to an additional $9bln-$10bln of acquisition capacity remaining.
ATD's €120mm (26% of acquired EBITDA) synergy target over three years, representing mostly revenue synergies, seems conservative. Although a five-year supply agreement prevents mid-term fuel procurement synergies, merchandise procurement and opex savings could definitely add to this. We see the deal adding ~ $0.30 to EPS after synergies, before accounting for organic growth and a slowdown in the NCIB.
TD Investment Conclusion
Currency movements are placing pressure on U.S. dollar earnings, but also boosting our Canadian-dollar target price. The shares are +5% YTD (tops within our coverage), and we see further upside despite expected pressure on F2024 EPS growth from lapping tougher fuel margins — the market appears more focused on merchandise SSSG (which is generally strong) and acquisition opportunities (which appear more readily available).