After the late Wednesday release of weaker-than-anticipated third-quarter results and a reduction to its full-year guidance, TD Cowen analyst Michael Van Aelst is expected investors to react negatively to Parkland Corp. (PKI-T).
“Weak Refining capture rates left Q3 earnings short of already reduced estimates, while low crack spreads and International wholesale volumes led PKI to cut 2024 adj. EBITDA guidance to $1.70-$1.75-billion (from $1.9-$2.0-billion),” he said. “Our estimate drops to $1.72-billlion and consensus (currently 1 per cent above the top end) should follow.”
The Calgary-based company reported adjusted EBITDA for the quarter of $431-milllion, down from $585-million during the same period a year ago and 4 per cent below the recently lowered estimates of both Mr. Van Aelst ($450-million) and the Street ($451-million).
“Retail and Commercial adj. EBITDA increased 1 per cent (excluding last year’s insurance recoveries and forex gains) as expected, with each of the marketing divisions coming generally in line,” he said. “Canada delivered the strongest performance (EBITDA up 5 per cent) with generally solid all-around execution and healthy fuel margins offsetting a meaningful drop in tobacco sales and a soft consumer (despite lower industry demand, PKI seems to be gaining share). International profit was the weakest, down 8 per cent year-over-year, as it faced increased competition for the less stable spot wholesale volumes.
“Refining is having a difficult year — only 2020 (year-one of COVID-19) was worse. With the unexpected Q1 shutdown, weak refinery margins year-to-date, and Q4 not looking much better, we see Refining profits coming in $232-million below last year’s more typical level. The declining commodity price environment and weaker carbon credit markets (amid cheap renewable diesel imports) have compressed H2 capture rates more than anticipated.”
Suggesting another guidance reduction could “give a momentum boost to activists,” Mr. Van Aelst trimmed his target for Parkland shares by $1 to $52, keeping a “buy” rating, to reflect his lower forecast. The average target on the Street is $49.83.
“PKI now trades at 6.4 times our NTM [next 12-month] EBITDA, a material discount to the 8.5 times weighted peer-group average as elevated leverage and temporary profit headwinds taint investor optimism,” he concluded. “Much of the weakness is caused by weak crack spreads and capture rates, which should recover once industry-wide refinery downtime normalizes, although soft demand is also magnifying the oversupply challenges. 2024 guidance has been cut to $1.70-$1.75-billion, but management will likely look for alternative avenues to achieve its $2.5-billion EBITDA target by 2028. Support for activists or Simpson could get a boost from the additional near-term challenges, though the latter may have to await the court’s decision on the validity of its governance agreement (expected in Q1/25) before supporting a proxy battle or another takeover attempt. FCF yields of 9 per cent/12 per cent (pre-divestitures) in 2025/2026 look attractive, and we see this ultimately allowing valuation to return closer to historical averages as PKI deleverages”
Elsewhere, BMO’s John Gibson cut his target to $44 from $46 with an “outperform” rating.
“PKI’s Q3/24 results were softer due to weaker refinery margins and pressures in commercial operations. As expected, the company reduced its EBITDA guidance to a range of $1.7-1.75 billion ($1.9-2.0 billion prior). We continue to believe longer-term upside lies in its shares, particularly given its compressed valuation, although the company will need to find a way to resolve current shareholder issues,” he said.