CIBC ReportEQUITY RESEARCH
March 16, 2023 Earnings Update
ALIMENTATION COUCHE-TARD INC.
A Deeper Step Into Europe
Our Conclusion
ATD’s mixed Q3 results were overshadowed by the proposed acquisition of
nearly 2,200 c-store locations in Europe. We view the deal favourably, with
an attractive valuation, and access to new markets with quality assets
somewhat offset by muted near-term synergies and near-term challenges in
that region. Our estimates are updated but little changed. Our price target
rises to C$76 (from C$73) as we roll forward our valuation to F2024, though
we moderate our multiple to 22x given deployment of capital into Europe and
muted synergy communication. ATD is Outperformer rated.
Key Points
M&A Boosts Europe Exposure And Carries Longer-term Upside: ATD
will acquire 100% of TotalEnergies’ retail assets in Germany and the
Netherlands and a 60% controlling interest in Belgium and Luxembourg for
€3.1B (or ~8x EV/EBITDA pre-synergies). We view this transaction positively
given: 1) these are high quality locations with strong market positions in their
respective geographies; 2) it expands ATD’s reach into key European
economies; 3) attractive valuation; and 4) over-penetration of car washes.
Mgmt. quantified €120MM in three-year synergies (26% of EBITDA) mostly
driven by TotalEnergies’ inside sales sitting 30%-40% lower vs. ATD’s
European network. Cost synergies may be more difficult to come by vs. prior
deals given labour regulations and a five-year fuel supply agreement, but
management was cautiously optimistic on its outlook for “significant”
procurement synergies. We believe the final synergy figure will be more in
line with ATD’s historical range of closer to 50% of EBITDA.
U.S. Merchandise Trends Continue To Remain Healthy: ATD’s various
merchandising initiatives (i.e., Fresh Food Fast same-store sales (SSS) of
23%, coffee rebrand etc.) continued to resonate with consumers and drove
healthy merchandise SSS, with the three-year stack holding steady
sequentially. Furthermore, merchandise margins are holding up despite
elevated inflation, and we see ATD’s fresh food offering as a multi-year
margin tailwind as sales ramp, operations scale and shrink decreases.
Fuel Margin Noise, But Still See ATD As An Outperformer: Q3 marked
the second straight quarter ATD’s U.S. fuel margins minimally outperformed
the industry. We attribute this largely to the relative stability of crude prices,
whereas ATD thrives with volatility. Fuel margins have remained below YTD
trends through the first six weeks of Q4 (OPIS averaged 35cpg), but longer-
term we expect they will hold above pre-pandemic levels as the c-store
industry (and smaller operators, in particular) faces structural cost pressures
and higher breakeven margins. Furthermore, ATD has demonstrated a track
record of being able to outperform the industry given multiple initiatives
aimed at leveraging its leading scale.