Description

Parkland Corporation (“Parkland” or “PKI”) is a vertically integrated fuel and convenience retailer. Parkland is the largest fuel retailer in Canada based on its number of stores. It has recently grown into other geographies including the U.S. and the Caribbean. Parkland’s strategy has been to vertically integrate and gain scale in order to source fuel at a lower cost than competitors. Parkland has been very acquisitive throughout the years to gain that scale, including the acquisition of Sol Investments, a Caribbean-based fuel retailer; the acquisition of Chevron Canada, a fuel and convenience retailer (which also came with a refinery in British Columbia); the purchase of many small fuel retailers in the U.S.; and the recent purchase of a frozen food retail franchisor, M&M Food Markets (to bolster its foodservice offerings in its convenience locations). Parkland is comprised of four operating segments (segment EBITDA excludes corporate expenses):

1. Canada ($702M 2022 Adj. EBITDA): The Canadian segment owns, supplies, and supports a coast-to-coast network of retail gas stations, operates convenience stores, and distributes propane, heating oil, lubricants, and other products to commercial, industrial, and residential customers. The company operates under multiple fuel retailing banners including Ultramar, Esso, Fas Gas Plus, Chevron, Pioneer, Husky, and On the Run. Parkland is in the process of rebranding many of its locations under the On the Run banner as well as rolling out additional foodservice offerings through its recently acquired M&M business.
2. International ($383M 2022 Adj. EBITDA): International includes operations in 23 countries and territories, predominantly located in the Caribbean. International operates and services a network of retail service stations under brands including Sol, Esso, Shell, and Texaco and owns the Sol Shop convenience store brand. International operations also serve commercial, industrial, and aviation businesses in these locations.
3. USA ($126M 2022 Adj. EBITDA): This segment delivers fuel, lubricants, and other related products and services to commercial and wholesale customers. The company has been very acquisitive in this geography recently, including eight acquisitions over the last three years.
4. Refining ($516M 2022 Adj. EBITDA): Parkland owns and operates a single refinery in Burnaby, British Columbia with a capacity of 55 thousand barrels per day. This refinery primarily supplies its own network of retail locations in British Columbia (85% of output), as well as third party consumers such as the Vancouver Airport and the Vancouver ferry system.

Corporate overhead was $107M in 2022 leading to a total Adj. EBITDA of $1,620M in 2022. The Company has guided to an Adj. EBITDA between $1,700M and $1,800M in 2023 and has provided a target of $2,000M Adj. EBITDA in 2025. Note that all $ are in Canadian dollars. 

Our investment thesis in PKI is predicated on the following components:

• Durable supply advantage: Parkland benefits from a durable supply advantage. In 2022 Parkland sold over 25 billion liters of fuel at retail. This volume makes them one of the largest fuel retailers in North America. With this scale, Parkland can demand better pricing from refiners. Given its mix of businesses, Parkland is also able to purchase more categories of refined products from the refineries, thus increasing its share of wallet and further lowering the ultimate prices it pays. For example, Parkland owns cardlock fueling locations that serve diesel trucks, and thus Parkland also buys diesel from the refineries. Finally, Parkland also owns the infrastructure to move, store, and blend gasoline which it can use to arbitrage price differences among regions and further lower its costs to serve its retail footprint.
• Significant increase in free cash flow and material deleveraging as Parkland pauses acquisitions and focuses on integration and organic growth: Parkland has historically been an acquisitive company but has been particularly acquisitive over the past couple of years, increasing its leverage to a level that has made some investors uncomfortable. We believe this has negatively impacted Parkland’s multiple. Investors have communicated with management to slow down the pace of acquisitions, focus on integrating the acquired assets, generate free cash flow, and pay down debt. Management has recently committed to doing just that. Most of the recent acquisitions were in the U.S. geography, as Parkland is using its supply advantage in Canada to enter certain U.S. states (primarily in the Rockies), as well as its presence in the Caribbean to enter Florida. Management is now working to integrate these acquisitions better and increase profitability, which should lead to incremental EBITDA contribution, more free cash flow, and a lower leverage profile. The Company ended 2022 with a leverage ratio of 3.4x and targets the low end of its 2.0x to 3.0x target range by 2025.
• Ability to monetize non-core assets: PKI retains valuable non-core assets. For example, the company owns the real estate for many of its urban locations around cities such as Vancouver, Toronto, and Montreal. In many of these locations the real estate could be put to better use. Parkland also owns businesses that are adjacent to its fuel supply business that could and should be monetized. Examples include Parkland’s propane, heating oil, and lubricants distribution businesses. These businesses are valuable in their own right due to the stability of their earnings (Superior Plus Corp. (TSX: SPB), a large Canadian energy distributor, trades at around 8x EBITDA), however, they are less core to Parkland’s competitive positioning in its core fuel retailing and merchandising markets. As a result of shareholder pressure, Parkland has recently announced plans to divest assets for $500M of proceeds to help simplify the business and unlock shareholder value. 
• Implementing an improved merchandising strategy: In 2016, Parkland purchased the convenience brand On the Run. This is a strong brand in the Canadian market that used to be owned by Imperial Oil. Despite the strength of the brand, management continued to run a number of different brands for its retail locations. Parkland is finally in the process of creating a unified North American convenience brand. Rebranded locations under the On the Run brand will contain a larger convenience and foodservice offering, the potential to include a quick service restaurant, and where possible, a rebranding of the station itself (the canopy above the fuel pumps) to On the Run which would allow for the acquisition of non-branded fuel. We expect these initiatives to significantly grow the contribution from higher value merchandising operations and drive more traffic to the locations.

If Parkland executes on the initiatives we highlight above, we believe it would create material value for shareholders. Management’s plan calls for Adjusted EBITDA of around $2,000M in 2025 with ~50% coming from retail, ~30% from commercial and ~20% coming from refining operations. Management has stated that the company can reach this target of $,2000M 2025 Adj. EBITDA without any additional M&A and assuming some of the non-core asset sales. Assuming an EBITDA multiple of 8.0x for the retail businesses, 7.0x for the commercial business and 3.5x for the refining business, the company would trade at approximately $52 per share at the beginning of 2025, a premium of approximately 50% from today’s levels. The company pays a dividend of $1.36 per year (4% dividend yield). For simplicity’s sake, we have assumed no dividend is paid to arrive at our price target. In practice, some of the returns will actually come in the form of a dividend. The company is very cash flow generative. With EBITDA around $1,750M in 2023 (at the midpoint of the guidance range), we expect FCF around $700M, implying that the stock currently trades at a 2023 FCF yield of approximately 12%. Parkland currently trades at 6.9x 20203 Adj. EBITDA. 

Some may question the terminal value of the business and it’s a fair question. We would note the following:

1. Parkland trades at a very significant discount to peers such as Couche-Tard (north of 10x EBITDA) or Sunoco (8.5x EBITDA). These businesses face similar long-term threats from the rise of electrical vehicles. Our target valuation assumes a valuation in par with Sunoco for the fuel and convenience side of the business. If the issue with Parkland was a terminal value issue, we doubt these 2 peers would trade at the multiples they trade at. 
2. The Company is experimenting with EV chargers at its locations. They believe that when someone comes to charge their vehicle, they will stay 30 min versus just a few minutes when refueling a car. This creates a significant opportunity to sell food and other merchandising to that customer, from there the Company’s focus on improving its merchandise offering.

Catalyst

Reaching the 2025 targets

Deleveraging and free cash flow generation