PARKLAND CORPORATION
Board Changes Come As A Surprise But Fundamental Outlook
Remains Healthy
Key Takeaway: PKI announced the departure of Simpson Oil Limited
(Simpson) nominees from the company's Board of Directors, effective
December 31, 2023. We recognize that this unexpected Board change will
likely be viewed as a knee-jerk negative headline, with a shift in focus now to
whether Simpson will look to sell down its PKI stake. We do not know what
motivated this Board change but we do believe it is not related to the five-
year plan PKI laid out at its recent Investor Day or the company’s operating
performance. While this recent development is likely to weigh on PKI's share
price until we have more clarity, in our view it does not impact the positive
fundamental outlook for the company.
What’s The Event? PKI announced the departure of Simpson nominees
Michael Christiansen and Marc Halley from the company's Board of
Directors, effective December 31, 2023. This move does come as a surprise
given these directors were added to the Board last year. Mr. Christiansen
and Mr. Halley were nominated for election to the Board pursuant to the
terms of the Board Nomination Agreement between Simpson and PKI, dated
March 21, 2023 and subsequently elected to the Board at PKI’s Annual
General Meeting on May 4, 2023. Simpson has provided notice of its waiver
of its nomination rights under the Board Nomination Agreement. In
accordance with its terms, the Board Nomination Agreement will terminate as
of April 2, 2024. Simpson remains subject to the standstill, voting and other
obligations set forth in the governance agreement between Simpson and PKI
dated January 8, 2019.
Our Main Takeaways: Below are our main takeaways from this
announcement.
1. Fundamental Outlook Remains Positive: While the unexpected Board
change will likely be viewed as a knee-jerk negative headline, in our view
it does not impact the fundamental outlook for the company. At PKI's
recent Investor Day, it outlined a plan targeting adj. EBITDA of $2.5B,
driven by organic growth, synergy capture and cost efficiencies. The
company sees the potential to generate up to $3B of adj. EBITDA in
2028, reflecting inorganic growth opportunities. PKI provided its capital
allocation frame as it expects to generate $6B in cumulative available
cash flow from 2024 to 2028. We see this driving significant equity
upside, with PKI having good line of sight to hitting its targets. As we
highlight in our PKI Investor Day recap note (link to note), taking PKI's
2028 financial targets and its 10-year average EV/EBITDA multiple
implies an equity value per share of ~$100. We also note that given Mr.
Christiansen and Mr. Halley were directors when PKI’s new five-year
plan was released, this suggests Simpson is supportive of the company’s
long-term strategy.
2. Simpson's PKI Ownership: Simpson owns 34.4MM shares of PKI or 19.6% of the
shares outstanding. The company has been a shareholder since 2017, and was an
investor even before PKI acquired SOL. When PKI acquired 75% of SOL on January 8,
2019, Simpson received 12.16MM shares at $42.62. Simpson received another 20MM
when PKI exercised its option to acquire the remaining 25% in August 2022. We estimate
the book value of Simpson's PKI holdings is ~$1.28B, versus the current value of these
holding at ~$1.47B.
3. Does The Board Change Suggest A Change In Simpson's Commitment To PKI?
The immediate investor concern is whether Simpson will look to reduce its stake in PKI.
We cannot answer this question but we note following: i) Our understanding is that there
has been no indication of Simpson looking to reduce its position in PKI. ii) Given the size
of Simpson's PKI holding, we would expect any selling to be done in an orderly manner,
as it is the largest shareholder. We see no incentive for Simpson to act as a negative
weight on PKI's stock. iii) Operationally, PKI has executed well against its prior plans. On
a consolidated level, PKI expects to hit its previous five-year $2B EBITDA target a year
early in 2024. Within SOL, PKI has grown this EBITDA from $280MM at the time the deal
was announced back in October 2018 to $631MM on a TTM basis at end-Q3/23. We
would imagine that Simpson would view PKI's operating performance in a positive light.
4. PKI's Strong Cash Flow Generation Puts It In A Position To Work With Simpson:
PKI expects to generate $6B in cumulative available cash flow from 2024 to 2028, of
which $1.5B will be available for dividends and share buybacks and $1.5B (25%) to
organic growth initiatives. With the remaining $3B (50%) of anticipated capital, PKI will
prioritize reducing its leverage ratio to the low end of its 2x-3x target range by the end of
2025. Beyond that and looking forward through 2028, PKI expects capital will be
allocated opportunistically including additional share buybacks and inorganic growth
opportunities. In other words, PKI's cash generation puts it in a good position to work with
Simpson to ensure an orderly transition if it does decide to reduce its stake.
5. Governance Agreement Still In Force: While the Simpson representatives are no
longer on PKI's Board, the company is still subject to the Governance Agreement. This
includes: (i) voting in a manner consistent with the public recommendation of the Board,
or abstain from voting but noting the withholding of any vote; (ii) it is prevented from
calling a meeting of shareholders of PKI or initiating any shareholder proposal for action
of PKI’s shareholders, or seeking election or appointment to or to place a representative
on the Board or seeking the removal or suspension of any director from the Board; (iii) it
cannot engage in any other action similar to that of an activist investor; (iv) while Simpson
owns in excess of 5% of PKI, it shall not transfer any shares in connection with any
takeover bid, tender offer, exchange offer, merger, amalgamation, arrangement,
reorganization or other business combination or other similar transaction unless it is a
permitted transfer; and (v) it is prevented from seeking a takeover bid. The Governance
Agreement is in place unless there is a "Material Adverse Change" as defined in the
agreement or if Simpson's ownership in PKI falls to below 5%.
Price Target Calculation
We derive our 12- to 18-month price target of $57 using a sum-of-the-parts analysis on
2025E EBITDA (which implies an EV/EBITDA multiple of ~7.5x) and pro forma net debt of
$5.3B