Alimentation Couche-Tard Inc.
Filling the tank: ATD achieves EBITDA target one year early, outlook constructive despite headwinds
Our view: ATD’s ability to drive solid results in FQ4 despite rapidly shifting backdrop reinforces our view that ATD is on track to meet or exceed its F23 $5.1B EBITDA target ex-M&A as rising costs likely sustain fuel margins above pre-pandemic levels. With shares trading toward the lower end of the 2015+ range, strong FCF across cycles, a clean balance sheet, and opportunity for strategic M&A, we think current valuation presents a compelling opportunity. Reiterating Outperform rating and $77 PT.
Key points:
On track to deliver $5.1B EBITDA target by F23 notwithstanding transient fuel demand and cost headwinds. Management confirmed on the call that inflation is impacting consumer behaviour. Miles driven (US: +1.5% Y/Y in April vs. +5.6% in Q1) and volume per visit (~10-12 gal/visit pre-COVID to about 8 gal/visit in recent Qs) have both moderated, but number of visits has risen. However, apparent demand destruction is likely temporary, as RBC Global Energy Strategist Michael Tran noted in Oil Strategy: Feeling for the Ceiling (“...historically, we rarely see large and material amounts of true demand destruction”), absent a recession, and for now employment levels remain strong. Nonetheless, our forecasts assume F23E fuel volumes ~10% below pre-COVID, 7.5% below in F24E (Exhibit 3). However, we reiterate our view that the pandemic-related volume shock correlates strongly with record industry fuel margins, augmented at ATD by sophisticated procurement strategies and the ongoing shift to Circle K fuel brand, moderating all-in wholesale costs, and shifting a portion of the burden to opex, with net positive benefit to the bottom line.
Ready and able to seize on M&A opportunities. In response to a question around the outlook for M&A valuations against the backdrop of uncertain economic trends, management noted gathering headwinds, including rising rates, testy high-yield markets, and timid PE involvement, with tepid US deal flow relative to opportunities arising in Europe and Asia. In any M&A situation, we would expect ATD to apply the same rigor and discipline that’s been the hallmark of mid-teens ROIC. Notable situations of size include the potential sale of the Petro-Canada network and unconfirmed reports that ATD and EG Group are in talks.
Leverage largely stable at 1.39x, well below target 2.25x, extendable to 3.25–3.75x for strategic M&A. In lieu of M&A, our model makes productive use of estimated BS capacity >$15B by incorporating NCIB of 11% of shares O/S through the end of F24, contributing ~5% to our F24E EPS. Highest & best use of capital is likely to ultimately drive higher returns, in our view.
Valuation and outlook compelling to us; Outperform, $77 PT. Against the backdrop of accelerating inflation and rising rates, we recommend investors continue to gravitate toward staples and staple-like names that perform across the cycle. ATD is included in the RBC Global Top 30.