CA - Alimentation Couche-Tard Q3 Review: Impressive Results And Blockbuster Acquisition

2023-03-18 04:02:27 ET

Summary

• ATD:CA quietly reported strong earnings on March 15, 2023, without much fanfare, given the world's focus on banking stability & the liquidity of U.S. regional banks.
• The company announced record revenues, but a slight profit dip due to high inflationary costs on merchandise, notably due to food/beverage promotional programs.
• ATD:CA also announced a €3.1Bn ($4.5Bn) acquisition of TotalEnergies SA retail assets, at a multiple of ~8x EV/EBITDA.
• While SG&A costs inched higher, the underlying business remains strong, and the acquisition further bolsters the company as a global leader in full-fledged convenience store hubs. I re-iterate a "Buy" rating with a $77 price target. All numbers in CAD unless otherwise noted.

Introduction

Alimentation Couche-Tard ( ATD:CA ) (ANCTF) jumped 3% on March 16, 2023 after the company announced Q3 earnings and a new acquisition - though external market dynamics will likely impact the stock in the near term. My Q2 update and company report on ATD:CA showcased a bull view, and this quarter reinforced my initial opinion. Fuel prices dipped, but merchandise sales remained strong, and the company made a blockbuster acquisition of TotalEnergies SA ( TTE ) retail assets. ATD:CA's overall strategy remains clear and management has consistently hit or exceeded their guidance. ATD:CA is a resilient company that has succeeded in both good times and bad and remains undervalued today. I predict that the stock will rise to $77 per share within 18 months, supported by a FY2023 EV/EBITDA of 16.4x and a FY2023 P/E of 26.1x, slightly above peers, but warranted given their efficiencies and global reach.

Q3 Results

ATD:CA recently announced quarterly earnings on March 15, 2023 that were within expectations, though the share price has been volatile due to recent banking crisis fears. The company reported record revenue of $20.1Bn, but with adjusted net earnings of $741MM , down slightly from last years $746MM in the same period. Store merchandise revenues increased 5.5% in the U.S., but decreased 2% globally. The main source of the jump in revenues was higher fuel prices, as ATD:CA's road transportation fuel revenues rose 9% on higher volumes and margin expansion. With crude oil projected to increase toward $90/barrel in 2023, the current state of this business segment looks strong. These results contributed to impressive results in key investment metrics, including return on equity and return on capital employed, which reached 23.3% and 16.6%, above the metrics at the end of FY2022 of 21.8% and 15.4%, respectively. The company also repurchased $1.2Bn worth of shares during the quarter.

As inflationary costs persisted across the board, and with the company engaging in promotional behavior to generate more subscribers to its Sip and Save program, margins fell and weighed on profits. However, with consistent growth in merchandise revenues, along with impressive growth in both fuel and EV charging stations, ATD:CA generated impressive results. The company recently opened EV charging ports in South Carolina and Quebec as pilots, and now have over 11,000 store/home EV chargers, with more on the way. Between the progress of their overall growth strategy in EV charging, car washing, and merchandise, along with key acquisitions announced recently, ATD:CA is primed to further succeed in 2023.

ATD:CA recently bought True Blue Car Wash for an undisclosed amount as a tuck-in acquisition to support their car wash efforts. The company has narrowed in on this segment in as a high growth opportunity, as the long term viability of fuel stations may wane. If customers can charge their electric vehicle (EV) at home, EV charging stations will not be able to fully replace the current fuel business for ATD:CA. True Blue Car Wash has 65 sites in the U.S., sports 170,000 fast-pass subscription members, and was listed as one of the top growing private companies in the U.S. coupled with the fact that 85% of the car wash locations are within 3 miles of a Circle K store, this move is a no-brainer to not only assist their current convenience offerings, but also access a loyal customer base to increase sales penetration.

ATD:CA also recently bought 45 Big Red convenience stores in Arkansas, further adding to its footprint with a small acquisition. With 60% of the U.S. convenience store market being single stores, these small tuck in acquisitions will support its organic U.S. growth.

$4.5Bn Acquisition

On March 16, 2023, ATD:CA announced a blockbuster acquisition to acquire retail assets from TotalEnergies SA for €3.1Bn ($4.5Bn) at a multiple of ~8x EV/EBITDA. The proposed acquisition would compile 100% of TTE's retail assets in Germany and the Netherlands and include a 60% controlling interest in the Belgium and Luxembourg entities. The proposed acquisition would include 2,193 sites with just over half (1,195) being located in Germany. Brian Hannasch, CEO of ATD:CA, was excited on the earnings call , and highlighted that Couche-Tard had "been seeking a sizable acquisition" for some time. ATD:CA has a strong presence in Scandinavia and in the Baltic states, so this proposed acquisition shouldn't bring many, if any, anti-trust concerns, while bolstering its presence across the continent.

Analysts followed up on the earnings call concerning the acquisition. Irene Nattel of RBC asked about potential synergies; executives highlighted that service stations will expand from just selling fuel to become full-fledged service hubs, especially with EV charging become more prominent, given that they are slower than fuel charging. Next generation convenience stores must be inviting to consumers to generate growing revenues. Management also highlighted that fuel volumes at TTE stores are outperforming ATD:CA's current European assets, and noted that car wash penetration is stronger as well. Given these strengths, it seems plausible that upon approval, ATD:CA will continue to streamline operations and knowledge share across all European operations. Total synergies were estimated at €120MM over a 3-year term, but management cautioned that this is a conservative number and that further improvements in procurement across the Euro network should increase this number over time.

Overall, I think this is a good deal for ATD:CA. They didn't disclose the new term loan details, but the forecasted leverage ratio would rise from 1.5x to 2.1x (Debt/EBITDA), which isn't too high. ATD:CA targets a 2.25x ratio as an internal cap, so this would be within it, and given the EBITDA of the entity was ~€500MM for calendar 2022, over time this acquisition won't materially over-leverage the company. To develop into a leading global brand, entering Germany with sufficient infrastructure is key, and will pay long term dividends. Given ATD:CA's leading presence in Scandinavia, management understands customer needs and the changing market dynamics. EV charging is growing at a quicker pace in Europe than North America, and the company has kept up, with four recent truck EV charging site openings in Sweden. While ATD:CA was unsuccessful in its attempt to takeover Carrefour, this effort is better suited for the strengths of the brand and allows them to penetrate Germany and Netherlands in a higher margin way than via the grocery business. Analysts praised the deal and earnings, as evidenced by recent Buy ratings.

Model Shows Upside

ATD:CA has had an impressive start to the year, and shares were up 10% as of March 8, 2023 before liquidity fears spooked the market. Currently, shares are 5% higher year to date. While the company's net cash position is sure to drop, the company has sufficient liquidity to fund current growth plans. The model forecasts a current WACC of 6.7%. I anticipate the interest cost of the term loan to above 5%, given their previous debt issuances have coupon rates between 1.9%-4.5%.

I forecast the continuing value of $66.1Bn, given a 3% revenue increase this year and blended revenue growth of ~3.5% for three years as same store sales growth continues to impress. I see the margins dipping slightly into the end of the fiscal year and hold other cost ratios mostly equal to the previous model, as the company has reigned in costs historically. With a terminal revenue rate of 2.1%, and a terminal WACC above 7% given the new debt, a $77 share price (see below) can be supported by a FY2023 EV/EBITDA of 16.4x and a FY2023 P/E of 26.1x, in line with peers.

Conclusion

ATD:CA remains a leader in convenience retail globally and is worth a buy at these levels. The company sports robust operations and continues to expand globally, and over time, this European retail acquisition should bring more synergies than forecasted. Management has consistently delivered impressive returns on capital and I trust that they will not over-leverage the company. While global oil prices remain a risk to earnings, ATD:CA is primed to succeed in an EV future as not only a participant, but a leader thanks to their first mover position in Scandinavia. ATD:CA remains undervalued compared to peers and they operate in an industry ripe for consolidation. I see the company's multiple slowly expanding over time, and I forecast a $77 share price target over an 18-month time frame.

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