Investor Day Takeaways
Our Conclusion
Our key takeaways from PKI’s Investor Day were: 1) PKI highlighted its
ability to grow organically, which pushes back on the concern that the
company needs to make acquisitions to grow; 2) PKI is running a more
conservative balance sheet and is focused on per share earnings/cash flow
growth; and 3) PKI's supply advantage is a significant moat that allows it to
earn a more stable spread and ensures it has the lowest cost structure
amongst independents. Net-net, we walk with a positive view on PKI’s
growth strategy. We rate PKI an Outperformer with a $50 price target.
Key Points
De-commoditizing A Commodity Business: Fuel distribution is a
commoditized business where customers look for the lowest price. PKI’s
supply strategy helps create a moat around its operations and thus creates a
steadier and ratable earnings stream. PKI’s supply advantage ensures it has
the lowest purchase price for fuel amongst independent players by
leveraging its logistics assets, capabilities and scale. In terms of scale, PKI
sells 28B L of fuel, which means it benefits from a volume discount. It also
purchases a wide range of fuels (jet fuel, gasoline, diesel, etc.), meaning it
can buy a balanced barrel from a refinery, which is advantageous. In terms
of capabilities, PKI’s Elbow River group is able to move fuel between orbits
to play arbitrage opportunities and move volumes from markets that are long
product to those that are short product. This is all enabled by PKI’s logistics
assets (rail cars, ships, terminals). For example, in the U.S. segment, PKI
invested in rail terminals in Idaho to move product within the state given that
demand exceeds supply. PKI is able to move fuel from Western Canada into
the U.S. Rockies and Upper Midwest regions. In PKI’s International segment,
it is able to ship fuel into the Caribbean Islands and has invested in storage
facilities and a terminal (Sol Rome Depot) in Guyana to support the offshore
oil & gas industry in a country that is experiencing rapid economic growth.
This supply advantage ensures PKI has a cost advantage, which is key in a
commoditized industry.
ROIC Should Continue To Move Higher: PKI is targeting over 11% in
return on invested capital (ROIC) for 2024 versus 8.3% recorded in 2022.
The company’s ROIC has been impacted by its elevated M&A in 2021/22,
which immediately added to its invested capital base, but fully synergized
earnings take time to roll through the P&L. With M&A on pause and the
company focusing its efforts on integration and capturing synergies from its
past acquisitions, we believe PKI’s ROIC is on an upward trajectory for 2024-
2028. Looking at it simplistically, PKI is targeting $500MM of EBITDA growth
from 2024 to 2028 and organic growth investments of $1.5B. The implied
NOPAT from this organic EBITDA growth suggests an ROIC of 14%-15%. In
addition, as PKI allocates more capital to repurchasing shares, it is also
beneficial to ROIC. Net-net, we believe the company has an ROIC glide path
towards the mid-teens percentage range on a consolidated earnings basis