Parkland Corp has a 45 per cent upside, says Desjardins

Desjardins analyst David Newman believes Parkland Corporation (Parkland Corporation Stock Quote, Chart, News, Analysts, Financials TSX:PKI) has plenty of potential, maintaining a “Buy” rating and target price of $50.00/share for a projected return of 44.8 per cent in an update to clients on Wednesday.

Headquartered in Calgary, Parkland is a Canadian fuel contractor and distributor, with its supply coming from distribution terminals in Alberta and British Columbia. The company also operates approximately nearly 2,000 gas stations in Canada under the Ultramar, Esso, Fas Gas Plus, Chevron, Pioneer and RaceTrac brands, as well as the On the Run/Marché Express convenience store chain.

The company also supplies and distributes petroleum across almost a dozen northern US states and owns and operates Farstad Oil, Superpumper, Rhinehart Oil and Hart’s chain of gas stations.

Newman’s latest analysis is a preview of Parkland’s upcoming third quarter and included increased EBITDA estimates for the company’s third quarter financial results, which are expected to come in November.

“PKI should deliver solid results as the tailwinds from 1H21 continue, including the ramp in travel demand throughout the summer, strong fuel margins and crack spreads, and healthy c-store foot traffic,” Newman said.

Newman has revised his EBITDA projection to $355 million in the upcoming third quarter, up from his initial estimate of $339 million and ahead of the consensus projection of $340 million in EBITDA.

As a result, Newman’s annual EBITDA projections also inch slightly upward, posting a new estimate of $1.28 billion into play for 2021 from the previous $1.27 billion estimate, with 2022 coming in at $1.35 billion.

Meanwhile, the EV/adjusted EBITDA multiple projections paint a solid picture of the company, with Newman forecasting a drop from 9.8x in 2020 to a projected 7.4x in 2021, with further anticipated drops to 7x for 2022 and 6.9x for 2023 also projected.

Newman has also made slight revisions to his annual revenue projections, as he now forecasts $19.8 billion in revenue for 2021 from the previous $19.7 billion projection, with a similar increase to $21.5 billion from $21.4 billion now forecast for 2022.

Newman also made a slight revision to his free cash flow per share projection for 2021, raising his estimate to $4.26/share from $4.18/share.

In Canada, Newman forecasts four per cent year-over-year growth in fuel volume, with Newman noting that issues with labour and the supply chain did not impact the company’s ability to source merchandise and operate, but have slowed the pace of On the Run new builds and conversions.

“We believe some of the trends affecting the c-store sector in 2Q have continued into 3Q, such as the shift back to single-serve products (from large take-home formats), the strong growth in beverages, snacks, automotive fluid, and health and beauty products, and the return of other categories such as car wash and coffee stations,” Newman said.

Meanwhile, in referencing the company’s robust crack spreads, Newman also made note of the company’s refinery in Burnaby, B.C., with modelling of 22.9 cpl and a utilization rate of 95 per cent in the third quarter, with a decrease to 68 per cent utilization in the fourth quarter to yield full-year utilization of 86.3 per cent.

South of the border, the company has made significant inroads, with Newman pointing to a 92 per cent increase in fuel volume accomplished through acquisitions, along with a 16 per cent growth in retail, and a 45 per cent jump in its commercial sector.

Internationally, the company has seen 23 per cent growth in its fuel volume, also driven by acquisitions, though Newman notes that impact has been muted on account of seasonal slowdown given the overhang of the COVID-19 pandemic.

The company’s most recent quarterly results were released in August, headlined by revenue eclipsing $5 billion to go with $322 million in EBITDA in the quarter.

“We continue to advance our proven strategy through consistent operational execution, organic growth, financial discipline and accretive acquisitions. In parallel, our announcement of British Columbia’s largest network of electric vehicle ultra-fast chargers is a natural extension of our energy transition activities,” said Bob Espey, President and Chief Executive Officer of Parkland in the company’s August 6 press release.

In suggesting the stock is ‘as cheap as a Kwik-E-Mart day-old donut,’ Newman firmly believes in Parkland’s potential moving forward.

“We believe the deep discount is unwarranted given the overblown perception of the impact of electric vehicles, with PKI skewed toward remote areas and the Caribbean; the pace of ESG adoption at PKI (gaining ground in co-processing and EV charging); the overhang of COVID-19 on tourism in the Caribbean (strong forward bookings); and the impact of COVID-19 on driving activity (about 10 to 15 per cent below pre-pandemic levels),” Newman said. “We ran multiple scenarios, including a sum-of-the-parts valuation and an analysis of the refinery, which concluded that PKI is too cheap to ignore.”

Overall, Parkland’s stock price has dropped by 10.4 per cent for the year to date. Its value has steadily declined since reaching a high point of $44.48/share on January 11, though it has experienced a slight rebound since hitting a low point of $34.37/share on September 21.