Summary
Parkland (known as Parkland Corporation, ticker: PKI, trades on the TSE) is an independent supplier and marketer of fuel and petroleum products and a leading convenience store operator. It is based in Calgary, Alberta, and operates gas stations under the Chevron, Pioneer, Ultramar, Fas Gas Plus brands, and more.

The company operates its own 55,000-barrel-per-day refinery in Burnaby, BC. It also provides services in Canada, the U.S., and the Caribbean through three channels: Retail, Commercial, and Wholesale.
 
Company details
A few weeks ago, I ran across an article on Parkland. It explained how an activist shareholder (Engine Capital, a hedge fund) recently urged the company to look at spinning off or selling its refinery to create a “pure play” fuel and convenience-store retailer. Parkland acknowledged that it had received the letter from Engine Capital and said in a statement, “The company appreciates constructive shareholder input and will provide an update in due course.”

This got me thinking about whether Parkland stock is undervalued, if it would start trading at higher multiples because of this letter, and whether it’s a possible investment opportunity or not.

In early 2022, Parkland bought M&M Food Market, a frozen food retailer in Western Canada. This was in part to reach the $2 billion EBITDA target by 2025 and because the acquisition “represents one of many steps we are taking in our retail diversification strategy.” The transaction cost was $322 million, which was funded out of its existing credit facility capacity and represented a valuation metric of less than 8.5x estimated 2021 Adjusted EBITDA.

The acquisition included over 300 M&M franchises, 2,000 M&M Express locations, and 2 million active members. M&M’s reward programs also combined with Journey’s nationwide rewards and customer loyalty program. M&M’s 2 million active members will be a part of JOURNIE’s rewards and allow new members to be a part of a premier loyalty program. This offers fuel savings and merchandise offers in select provinces across Canada.

As far as future growth, M&M Canada’s Adjusted EBITDA is expected to be $55 million in 3 years, which will likely turn into free cash flow given the frozen food company’s royalty fee-based operating model (M&M receives a royalty from its franchisees).

2022 Financials
During 2022, Parkland reported total revenue of approximately $35.5 billion (an increase of 70% compared to 2021) and a net income of $346 million. $310 million of net income went to shareholders (dividend yield of 4.26% or $0.34 per share per quarter) and the company had an EPS of $1.94 compared to $0.64 in 2021.

Adjusted operating cash flow for 2022 was $1.26 billion and $818 million for distributable cash flow, with DCF per share at $5.11. This is important as it shows that the free cash flow yield for Parkland is almost 15% (free cash flow yield shows how much cash a company is generating to satisfy its debt, dividend payouts, and other obligations. The higher the free cash flow yield, the better).

Guidance
For full-year EBITDA in 2023, Parkland expects between $1.7 – $1.8 billion, an increase of 5%-11% compared to 2022. Looking further into the future, the company is focused on reducing its leverage ratio (a ratio that looks at how much capital a company has to meet its financial obligations. This capital is made up of both equity and debt) this year and into 2025. Net debt is expected to be reduced by 3 times EBITDA by the end of 2023. With EBITDA guidance between $1.7 – $1.8 billion for this year, year-end net debt is expected to be $5.1 billion – $5.4 billion (expected EBITDA for 2023 is between $1.7 – $1.8 billion * 3 = $5.1 – $5.4 billion). This should drop down to $4 billion at the end of 2025.

Investment thesis
What I like most about Parkland are its diversification strategy, cash flow, and debt control. M&M was acquired by Parkland’s existing cash flows and its CEO, Bob Espey, has locked in the cost of debt for the majority of the outstanding debt. Although the company has $6.1 billion in gross debt, $4.5 billion of that has a fixed interest rate. While the income statement will be impacted by increasing interest rates, no fixed-rate debt matures before 2026, which will allow for future free cash flow to reduce the credit facility.

With M&M and Journie combined, this will allow customers to use their reward points at gas stations and at M&M or vice versa. Parkland also has convenience stores at each of its gas stations, making it easy to carry M&M products.

Analyst consensus:
Currently, Parkland shares trade for $31.91 and the average price target is $38.61. Based on my analysis of its current EPS, earnings growth, and P/E ratio, I believe the intrinsic value of Parkland stock is $38.51. This means there is potentially a 21% upside in investing in Parkland right now.

Conclusion
Given its future growth, acquisition of M&M, and free cash flow generation, I believe Parkland is a buy right now and I will be taking a position in the stock.