CA - Alimentation Couche-Tard: Great Earnings To Close Out The Year

2023-06-28 10:00:22 ET

Summary

• Alimentation Couche-Tard recently reported great Q4 results.
• The company announced the acquisition of TotalEnergies' European retail network.
• The deal is accretive for shareholders at an 8 times EBITDA multiple and a great strategic fit.

In February, I started to cover Alimentation Couche-Tard (ATD:CA) and shortly after, initiated a position in this convenience store behemoth and proven compounder. Since then, the stock hasn't done much. The stock has seen a tremendous run over the last two years but has often had periods of stagnation in the past. Q4 earnings just released and I also want to weigh in on its recent acquisition in March, which got approved this week .

Fourth quarter earnings

The fourth quarter saw sales decline by 1%, driven by lower fuel revenues (-4.2%), offset by an 11% increase in higher margin merchandise and service revenues. Same-store sales (SSS) increased by low to mid-single-digit across the three regions. Volumes shrank slightly in Europe (-2.4%), while the US (0.5%) and Canada were positive (6%). Net Income skyrocketed by 40.4% and due to the continued repurchases ATD is doing, EPS grew 47.8%. Another KPI to watch is Return on Capital Employed (ROCE), which increased to 17.5% for the full year, driven by higher EBIT. Expenses increased by 8.3% year over year, a highly unusual sight for ATD, known for rigorous cost controls (see below). I expect expense growth to return to the 2% average as inflation eases. ATD ended the year on a strong note on all fronts.

An innovator in a boring industry

One of the things that really fascinated me about ATD when I initially researched the company was its immense focus on innovation. I did not expect this from a company in the convenience store industry. The company constantly innovates and tries new store concepts, features, and ways to optimize employee time and costs. Some concepts they are working on are automation, payment by license plate, frictionless stores and self-checkout. The loyalty program is also a focus: ATD knows that few strong customers drive much of the sales, so you want them to keep returning. Additionally, ATD has set up the Circle K Venture Fund, which aims to invest $100 million into companies that could enhance the business.

The TotalEnergies store deal

In 2021 ATD management said the following:

We have often said that the multiples we see right now don't make sense to us, so we chose to walk away from the deals

With interest rates going up, the M&A flow for Couche-Tard has improved as competitors without the same financial profile as ATD are driven out. ATD has announced one of its largest deals to penetrate the European market further. In a deal with TotalEnergies (TTE), the company is acquiring the entire German and Dutch Retail network and a 60% stake in the Belgium and Luxembourg companies. Total wants to focus its business and get rid of the retail network but wants to continue participating in its best markets: Total has the #1 market share in Belgium, #2 in Luxembourg and #4 in Germany and the Netherlands. The deal covers 2,193 stores, 975 of which include car wash operations.

The purchase price is 3.1 billion Euros or eight times EBITDA, paid in cash. This is an accretive multiple compared to the ~10 times EBITDA ATD trades at. Synergies are expected to be around 120 million Euros over the first three years, mainly from top-line growth and merchandise uplift due to ATDs ability to improve operations. Furthermore, this deal allows ATD to significantly increase its scale in Europe, with many EV growth markets. The transition to more Electric Vehicles is an uncertainty in the business model of ATD and the company is proactively developing market leadership in European markets, especially Scandinavia. The learnings will then be applied to the US market.

The company has a history of successful M&A and quickly delevering if leverage exceeds the 2.25 times EBITDA target. The Total Energies deal wouldn't even push them above the threshold. We can see below that the company reached its lowest-ever leverage level in 2021, as it wasn't willing to pay the premium valuations. This left them in an excellent position to do deals now.

A compelling valuation

Let's do a potential pro forma inverse DCF analysis to value ATD. I added $3.326 billion to the debt to account for the acquisition price. ATD expects around 455 million Euros in EBITDA (this excludes the non-controlling interest of TotalEnergies). Using their historical EBITDA to FCF conversion of 45%, we get 205 million euros or $220 million in additional FCF. This doesn't include any assumptions for possible synergies. We get to a required FCF growth rate of 8% or 2% for owner earnings for the next five years. I like to use owner earnings because most of the capex ATD uses is reinvested into the business.

ATD is a buy

I believe the assumptions made above are well achievable and that ATD is well priced to continue its market outperformance in the future. I have a 4% position in my portfolio and dollar cost average monthly to increase my exposure to this wonderfully managed business. Investors should continue to monitor the adoption of EV and how that could affect the business, but I believe ATD will be able to adopt successfully to however the environment for convenience stores changes.

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