Desjardins Capital Markets analyst Chris Li adds Parkland Corp. (TSX—PKI) back to his coverage list due to its “inexpensive valuation”. He says PKI is a “high-quality” and “well-managed” firm with a strong growth pipeline.
While the timing is uncertain, Mr. Li believes patient investors should be rewarded. Funds should flow specifically to PKI once the market’s energy rally eases and investors refocus on Parkland’s strong EBITDA (earnings before interest, taxes, depreciation and amortization) growth (20 per cent in 2022) and attractive FCF (free cash flow) yield of about 10 per cent.
“Although PKI is in the energy index, it does not benefit as much from rising energy prices as upstream companies,” Mr. Li says on April 13. “We do not believe the solid fundamentals are being reflected in the valuation, with the shares trading close to trough valuation of 7.2 times 2022 EBITDA and at a discount to the four-year average (8.8 times).
In addition, he says to expect mergers-and-acquisitions (M&A) to be topical again given a recent activist’s push for energy giant Suncor Energy Inc. to divest its high-quality Petro-Canada retail sites.
Turning focus inward
Comments from PKI management on the last earnings call suggest M&A will decelerate over the next 12 months as PKI focuses on integration, synergy realization and deleveraging. This includes the (unlikely) sale of PKI’s Burnaby refinery and a significant step up in capital return. The Burnaby refinery is a highly integrated asset within PKI. It is a bespoke refiner, not a merchant refiner, with roughly 85 per cent of the output fed into PKI’s system.
Over the next four years PKI will be deploying capital to high-growth, high-return initiatives to achieve its $2-billion EBITDA target by 2025 and lay the foundation for more growth beyond 2025. Ahead of the first-quarter 2022 results release on May 4 (after market close), the analyst increased his EBITDA estimate to $373 million from $352 million, in line with consensus.
The increase mainly reflects continuing fuel margin strength and fine-tuning of volume contribution from acquisitions, says Mr. Li. For similar reasons, he moves his 2022 adjusted EBITDA to $1.53 billion, closer to the high end of management’s $1.5 billion midrange (plus/minus five per cent).
Maintaining a positive long-term view on Parkland, the analyst reiterates a “buy” recommendation and a $49 per-share target price.
Chris Li is an equity analyst for Desjardins Capital Markets.
This is an edited version of an article that was originally published for subscribers in the May 20, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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