Tags
APGN:ID, APGN:LN, Applegreen plc, Bob Etchingham, convenience store, fresh food, gas stations, Irish value investing, Joe Barrett, maintenance free cash flow, owner-operators, petrol forecourt retailing, petrol stations, retail float, retail growth story, Topaz Energy
And yes, with the blog turning six this year & a tsunami of retail apocalypse headlines recently, it’s ironic I’m only now posting my first retail investment thesis ever! But rest assured, this isn’t some soggy chewed-up cigar butt. Nor some story stock priced & pitched for perfection. Though, almost inevitably, the retail sector only seems to come in those two flavours nowadays… Whereas Applegreen plc (APGN:ID, APGN:LN) is that rarest of beasts:
A bona fide long-term retail growth story trading for a value price.
And since it’s a retailer, first let’s focus on Applegreen’s story – its history, its people, its offering, its prospects – we’ll home in on the numbers later. If you’re a story person, I hope you enjoy the videos along the way. As for the numbers people…I definitely encourage you to circle back & watch ’em later! Let’s begin:
Applegreen is a major Irish petrol forecourt* retailer, with a significant & growing presence in the UK, and an emerging footprint in the US Northeast. [*As the Irish would say, a fillin’ station. To translate: A gas station, gasoline stand, gasbar, petrol station, petrol garage, petrol pump, service station, servo, etc….selling petrol, gas, or gasoline (& diesel)]. Bob Etchingham (CEO) founded the business as (Petrogas) in 1992, after working at Esso for 10 years, and was joined a year later by Joe Barrett (COO) (ex-Tesco & John West Foods). They’ve been described as ‘chalk & cheese’, and it’s obvious they play to their respective strengths & personalities in their roles. Growth was gradual at first, but from the outset management focused on developing its retail proposition & establishing a quality food offering. Which led to the launch of the Applegreen brand in 2005, heralding a distinctive retail-led proposition for customers built on a ‘Low Fuel Prices, Always’ price promise, ‘Better Value Always’ convenience shopping, and high quality own brand/international food & beverage offerings.
Let’s hear it from the horse’s mouth: Here’s an excellent Meet The Boss interview with Bob Etchingham (notably, four years prior to the company’s IPO), detailing Applegreen’s history, offering, strategy & growth plans:
The Applegreen brand launch also ignited a far more rapid development phase – the subsequent growth trajectory in the next decade was nothing short of spectacular – here’s some of the key milestones:
With a majority of sites in Ireland, which suffered a long & savage recession during this period, Applegreen’s 23% pa site growth & average 37% pa revenue/EBITDA growth was astonishing. [Particularly as they focused on single/small site acquisitions & new-builds]. Not surprisingly, a 2015 IPO followed, at EUR 3.80 per share – raising €70 million & achieving an initial €300 million market cap. Fidelity now has a 3% stake, while AXA’s accumulated a 10% holding. More intriguing, 12 West Capital Management has built up a €25 million stake (6.4%) since last September – one of the few foreign hedge funds targeting a smaller Irish company. It’s obviously reassuring for shareholders to have genuine owner-operators in charge here, with Etchingham & Barrett still owning a 60% stake in Applegreen (notably, there’s no egregious compensation/option/bonus schemes, or related party deals, lurking in the footnotes).
Applegreen’s growth trajectory is a testament to its customer proposition (with the awards to show for it). So why isn’t everyone doing it?! Well, you’d have to ask your typical forecourt owner. Which isn’t an oil major – for decades now, they’ve been exiting the sector (to re-focus on their upstream activities). Yes, you still see their branding everywhere, but now that’s canopy & forecourt investment they provide in return for long-term fuel supply agreements – most forecourts are now operated by individual owners, who own one or two sites at most. And nobody’s more resistant to new ideas, or investment, than your average small business owner…their offering hasn’t changed in decades: Erratically stocked & priced tobacco, alcohol, lottery tickets/scratch cards, soda, snacks, candy, newspapers/magazines, etc. served in a tired & dirty shop, by unengaged & surly staff. To call them food deserts would be a compliment – most owners aren’t remotely interested in offering healthy fresh food, considering all the hassle, regulations & investment in staff/equipment.
Now, let’s compare that to an Applegreen forecourt…
OK granted, the comparison was a little unfair…that was one of company’s flagship motorway service areas! But it definitely gets my point across – the video perfectly illustrates what Applegreen aspires to in its brand & customer offering. And it represents a new wave of innovation & competition which threatens to swamp small operators – which is nothing new:
[NB: The UK had about 40,000 stations in the mid-60s!]
But this time it may prove fatal, as it will become even more challenging for small retailers to compete in terms of forecourt investment, customer service & training, retail selection & pricing, fresh food & beverage offerings, external franchise partners, etc. It’s surprising the market’s still so fragmented today (vs. other sectors) – but with busier lifestyles, longer commuting & working hours, fewer family meals & smaller households, plus a relentless trend towards eating on-the-go, arguably even the most basic petrol/convenience retailing model has remained compelling for today’s consumer. Regardless, the number of stations will continue to decline, as small operators continue to exit, and large chains consolidate (& redevelop) the best sites.
Accordingly, Applegreen’s growth trajectory has continued – as of Dec-2016, it now has 243 sites (with brokers predicting close to 400 sites by end-2019). Here’s a snapshot of its headline CAGRs over the last 3 years:
Exc. dealer sites (see below), site CAGR was 18% pa – more representative of Applegreen’s core (i.e. company-operated) site growth. And lower revenue growth reflects a falling oil/petrol price – fuel still comprises 80% of revenue & is completely driven by oil prices, so total revenue isn’t all that reliable/relevant a metric. And noting static fuel margins, 25.8% pa food & store gross profit growth and 20.4% pa EBITDA growth are actually the best metrics to focus on here. Which is nicely illustrated by this FY-2016 revenue & gross profit analysis:
Applegreen earns a 5.7% fuel gross margin – which is pretty measly vs. a 29% store margin & a whopping 56% food margin. Almost two thirds of gross profit is being generated from 20% of total revenue! Which explains the ‘Low Fuel Prices, Always’ price promise – it’s actually a hook to get (new) customers in the door, with management confident the superior selection, pricing & quality of their store and food & beverage offerings will keep them coming back. Ultimately, the proposition isn’t just to fill your tank once a week…Applegreen would like to fill your belly three times a day! So take your pick – they recommend The Bakewell (the in-house cafe brand), with Subway being the other core brand across the estate:
And while that’s a long-term aspiration & opportunity for Applegreen, current momentum’s just as exciting: Read this recent interview with Etchingham, where he celebrates the return of ‘breakfast-roll man’ in Ireland. And peep at those revenue numbers again – how many retailers have you seen recently who can boast core (i.e. non-fuel) +7.1% LFL/ccy revenue growth (driven by +12.4% food growth)?
[Did I mention Applegreen’s the only listed Irish retail pure-play?!]
Now let’s review each of its target markets – breaking out 4 site categories:
Republic of Ireland (64% of the Applegreen Estate):
Dealers: A new category Applegreen’s ramped up in the last 3 years – now at 48 sites – here’s a short dealer testimonial video:
At this stage, adding dealers makes sense – it offers Applegreen incremental gross profit, requires little up-front investment (canopy & forecourt branding), extends the reach of its fuel network & ‘Low Fuel Prices, Always’ price promise, and leverages its own fuel buying*. However, dealers still control/operate any related retail offering, so I also worry about the scope for negative brand impact & customer confusion…it would be useful knowing what Applegreen does to mitigate such risk(s).
On the other hand, dealers enter into a 5 year relationship with Applegreen, so it’s a great way to line up a pipeline of potential sellers. [Or even franchisers?] As the sector’s so location-based, this approach is critical – Applegreen may get one chance to acquire a specific site, but it also needs to be disciplined in its M&A, so any edge evaluating/negotiating/locking down an acquisition is invaluable. Which includes leasing sites, if that’s what the seller wants. While Applegreen generally prefers to own (& build) its sites – and has the necessary financial capacity – it will lease as necessary & to enter a new local market/country (like the US). NB: Its pre-IPO expansion was more dependent on leasing, as it had significant debt outstanding & post-crisis financing was difficult to access – so a significant percentage of the estate is still leased.
[*Applegreen recently announced the proposed €16 million acquisition of a 50% interest in the Joint Fuels Terminal – one of Dublin’s three fuel-importing facilities. This strategically valuable platform will now provide a competitive supply direct from the refineries for the majority of its Irish fuel requirement, vs. purchasing it wholesale. The deal should also be earnings-accretive.]
Petrol Filling Stations: Applegreen now has 80 sites (of which 24 still need to be branded) – here’s a tour of their award winning Mount Merrion station:
Motorway/Trunk Road Service Areas: Applegreen now has 27 sites – here’s another Joe Barrett interview after launching Ireland’s first motorway service area in 2010:
Yup, just seven years ago, the Irish government finally conceded: ‘services we depend on while traveling will have to come out of the local towns & closer to the motorways where we need them’. I know, sounds ridiculous…but it’s also a huge opportunity! To explain:
The US & UK started building out their interstate/motorway networks from the late-50s. Whereas Ireland opted for a different approach, wasting decades rebuilding existing trunk roads. [Its motorway network was initially an 8 km stretch of road]. Which continued to be routed via the centre of almost every single town (& village), due to some strange collective delusion they’d collapse & die if by-passed. [And due to widespread political patronage (i.e. lobbying), judging by Barrett’s planning comments in the next video] Which delivered an oddly static commuting experience for decades – roads got faster & faster, towns got slower & slower… In the end, the towns cried uncle, after being strangled to death by all-day traffic – a motorway network was finally built out over the last two decades. Except it was only for feckin’ driving – not eating & drinking, like Yanks do every bloody 20 miles – so drivers took their lives in their hands, plus a full tank, food, energy drinks & a spare (empty) bottle or two, whenever they hit the motorway. Finally, in the 2010s, the government’s grudgingly approved a limited number of motorway service areas. Including, believe it or not…the Barack Obama Plaza!
But once you head down that road (!), consolidation into large motorway & nearby trunk road service areas is inevitable (as we saw in the US & UK, over decades). Which is a significant multi-year tail-wind for Applegreen, with service areas being a far more attractive proposition – in terms of higher margin non-fuel revenue – as they evolve into meet-up points/destinations, with a broad/complementary selection of fresh food & beverage offerings, comfortable cafe/lounge seating, wifi & play areas for road warriors, families, groups & kids’ parties. [And with the decline in pubs & drink-driving, forecourts are now a grab & go alternative for take-home alcohol]. The prospectus has a nice MSA vs. PFS comparison:
Ironically, this retarded road development in Ireland left a valuable legacy. Management has cited Wawa & Sheetz as inspiration*, but I think they’re being modest… In reality, Irish petrol retailing was uniquely well-developed. While US & UK retailers migrated out of town, Irish forecourts remained part of the local fabric in small towns & villages – prices may not have been the sharpest, but service was personal & friendly, and their offering often expanded to include fresh food, plus a grocery shop, chipper, pub, garage, car dealership, etc. [After all, a grocery shop, pub & undertakers in a single establishment was not unusual years ago!]. Applegreen’s reinvented this petrol station offering, adding a dash of ambience & theatre for the demanding modern Irish consumer. [Here’s a great industry presentation (p. 3-32), illustrating the Irish consumer appetite for premium food & beverage forecourt offerings]. And now it’s ready to export a brand proposition which represents good value for money, coupled with cheerful friendly service – much like other Irish brand successes overseas.
[*Actually, both Wawa & Sheetz originate from small PA family stores/dairies, suggesting they leveraged/held true to a similar background & tradition].
Judging from this meeting between Joe Barrett & Chet Cadieux of QuikTrip, Applegreen definitely has an offering that competes with the best of the US:
Applegreen’s main competitor in Ireland is Topaz Energy. Over the last decade, it focused on acquiring the Shell, Statoil & Esso chains in Ireland, building up a 35% market share, about double Applegreen’s current market share (a deceptive comparison, as dealer sites are a majority of the Topaz estate). However, their forecourt redevelopment was quite limited – no doubt, due to the ownership of Denis O’Brien & a conveyor belt of CEOs – they only stepped-up their offering in 2015, launching a Re.Store own-brand & announcing an Eddie Rockets deal. But this was quickly superceded by the sale of Topaz to Alimentation Couche-Tard (ATD/B:CN) later in 2015 – obviously, Couche-Tard has the experience & capital to rapidly upgrade the estate.
Which is less of a competitive threat than it appears, as it would be problematic for Couche-Tard to pull off another Irish acquisition, whereas Applegreen now enjoys clear blue sky overhead in terms of acquiring further market share. And their respective investment spending, innovative retail offerings & pricing power are sure to dominate the market – with consumers trained to expect forecourt, convenience store, and food & beverage offerings which the rest of the market will be hard-pressed to match. A de facto duopoly like that is often good for both companies… [You won’t be seeing Applegreen, Topaz & Euro Garages in a conference room together again!?] Though I’d expect Applegreen to promote its Irish ownership (& charitable endeavours) more actively now – and fortunately the brand supports that – a job made easier when Couche-Tard re-brands Topaz stores with its global Circle K brand…
United Kingdom (32% of the Applegreen Estate):
Petrol Filling Stations: Applegreen now has 71 sites (of which 47 still need to be branded…plenty of development potential here!). Here’s the Corby site:
The typical UK forecourt offering is far less developed than Ireland. When management first started scouting the UK – less than a decade ago – they couldn’t find a cup of coffee anywhere, let alone a good one!? [The roadside reputation of Little Chef didn’t help either…John Major never fully regained his credibility after admitting he loved to eat there]. We see it in the latest RoI vs. UK gross profit mix – food gross profit share is substantially lower in the UK, while a similar store gross profit share is somewhat misleading (it’s due to a high volume of low margin alcohol sales):
But overall, this represents relatively untapped territory for Applegreen’s business model. The acquisition economics for UK sites obviously tend to reflect current retail mix/consumer preferences nationally, so incremental investment in a UK site (to offer a differentiated store and food & beverage offering) is relatively low-risk. And as retailers will tell you, often the main battle is getting the customer in the door…once they’re in, Applegreen can offer something new & compelling, ideally bringing them back for more. And look at the table again – from the huge yoy jump in food gross profit share, from 16% to 22%, clearly the Applegreen strategy’s catching on…
Motorway/Trunk Road Service Areas: Applegreen now has 6 sites – here’s another perspective on their award winning M1 Lisburn site:
The UK’s the most consolidated market, by far – the supermarkets uniquely control well over 40% of the fuel market, while private equity & Gerald Ronson have created the super-dealers. Applegreen’s already proving it can compete with the supermarkets with its ‘Low Fuel Prices, Always’ price promise, while its store and food & beverage offerings certainly appear equal/superior to MRH, Motor Fuel Group & Rontec. Which pegs Euro Garages as its biggest competitor – no doubt due to its no alcohol sales policy, it has a more ambitious food & beverage offering (albeit, at a higher fuel price point). However, after its recent TDR Capital-arranged merger with EFR, the larger group may focus more on Europe now (where DCC plc (DCC:LN) is also building up a large estate).
[Dear God, I’ve written enough about Brexit already – for example, here. At this point, I think it’s irrelevant in terms of day-to-day forecourt spending habits, and considering Applegreen’s growth record during a savage Irish recession, I don’t expect it poses any serious threat to its long-term growth plans].
United States (4% of the Applegreen Estate):
Petrol Filling Stations: The US Northeast is a nascent market for Applegreen, with just 11 sites. So far, it’s stuck to leasing stores, and signing a franchise agreement with 7-Eleven, which is pretty standard for US gas stations. But management’s now more confident it’s a viable market & is currently ‘strengthening the organisational structure in the USA to ensure ongoing support for further growth and expansion’.
While regional chains like Wawa (remember Johnny Knoxville – ever noticed his tat?!), Sheetz, QuikTrip, Casey’s General Stores (CASY:US) – and not forgetting Couche-Tard – may have rabid fan-bases (it’s America, after all), the reality of the US petrol retailing market is very different. [Here’s a nice primer]. 124,000 convenience stores sell 80% of the gas purchased by Americans. Many are still branded by the oil majors, but they own less than 0.3% of them. And the market’s still absurdly fragmented – with almost 60% of sites owned by single-store operators & another 13% by owners with less than 50 stores. And absurdly over-regulated – as Bob Etchingham highlighted in his recent interview. Put it all together & the US market’s actually less competitive than Ireland, with fuel gross margins ranging between 6-7%. As for the typical single-store owner offering, it’s often worse than the picture I painted earlier – no matter how prosperous the town or region, the recipe seems to be:
Take a large box, add some parking, add plenty of salt, sugar & fat, mix briskly, sprinkle with some local white trash, bake, then set down on the bad side of town…
[I mean, why else is the average American consumer still so resistant & unacquainted with the idea of buying fresh food & beverages at a gas station?! Have another peep at the survey answers in this presentation.]
Which I wouldn’t describe as competition…compared to Applegreen’s typical offering!? Obviously, management needs to get their feet wet, and first master a typical US convenience offering & local competitive dynamics, but ultimately Applegreen’s unique & compelling proposition presents a potentially huge opportunity ahead in the US. Plus, I wouldn’t necessarily under-estimate the pulling power of an Irish brand, especially in the Northeast.
So that’s the story, in all its glory…but at what price?!
Check the Bloomberg – at today’s EUR 4.90 share price, Applegreen trades on a 2017 P/E of 20.6. If you’re not fully convinced by the story, or you’re a die-hard value guy, that’s likely too expensive for you to even contemplate buying. But if you believe in the growth story here, this multiple probably looks about right – in terms of current fair value – i.e. you expect rapid earnings growth, rather than multiple expansion necessarily. Or maybe you’re in the stock already…and increasingly frustrated. Here’s the price chart:
I hate to say it, but Applegreen must feel like a slightly busted IPO to many investors, especially small investors who never got a whiff of stock at the original offer price. Sure, it had a nice pop out of the gates, then rallied steadily to an all-time EUR 5.90 high in late 2015…but today, the shares are no higher than they were almost two years ago. But shareholders can’t blame management…they delivered! It’s a classic mistake – people got caught up in all the IPO/post-IPO/FOMO hype, which pumped up the valuation multiples they were willing to pay. Multiples substantially higher than we see today, noting Applegreen’s impressive growth trajectory since. But relative value doesn’t always equate to absolute value – so the stock isn’t necessarily a raging bargain today.
Except it is…
Because when I really focus on a company, I pull up the latest annual report…and start reading backwards! Which I recommend – it’s a great way to find lurking red flags & it forces you to focus on what really matters. Because ideally the management narrative’s there simply to confirm an exceptional story you’ve already discovered in the numbers… And in Applegreen’s case, here’s what I found almost immediately:
Do you see it..? OK, scanning the pdf instead, plus another few cash flow statements, might be easier:
[Yeah, I know: Trying to access/re-access Applegreen’s IR is really irritating – but it’s worth it!]
Yeah, that’s it…for the last five years (& longer, in fact), Applegreen’s managed to generate incremental negative working capital every single year.
That’s the magic of float!
Retail float…which for Applegreen, as of Dec-2016, amounted to over €86 million net (inventory plus trade & other receivables, less trade & other payables). Soon it will be 25% of its current market cap. [Props to Uncle Warren: He may be famous for insurance float, but the acquisition of See’s Candies was actually funded from Blue Chip Stamps’ retail float]. It’s float that requires cash & credit card revenue (i.e. minimal receivables), large payables (due to generous supplier terms), and minimal inventory investment due to exceptional stock management & turnover – I say exceptional, because the latter tends to trip up most businesses.
But as a petrol retailer, Applegreen benefits extraordinarily from the power of float. Fuel margins are low, but it’s high value/high volume, so a tsunami of cash comes in the door each day (& credit card payments take just 1-3 days to process) – not to mention, minimal returns/chargebacks – whereas it receives far more generous payment terms from fuel suppliers, while inventory’s highly restricted in terms of safety & storage capacity (high volume stations might get a delivery every day). Same for its store and food & beverage offering – albeit, with smaller numbers – cash & credit card revenues, inventory’s generally limited/perishable/high turnover, and it’s not unusual to wring 2-3 month payment terms from suppliers.
And presuming a stable/reliable business model like Applegreen’s, in terms of turnover & working capital ratios – this float (just like insurance float) is effectively tax-free & interest-free permanent financing. And if revenue keeps growing, and/or working capital ratios keep moving in a favourable direction, it will continue generating significant incremental free cash flow (as it’s done in the last 5 years). Which is, of course, available for investment – or distribution – judging by Applegreen’s RoCE to date & the potential opportunities ahead, investment remains the priority. But while the logic of retail float is sound, we should confirm these working capital ratios truly make sense, in terms of magnitude & direction. And more importantly, determine underlying free cash flow – as Applegreen’s invested all available free cash flow (& more) in new sites (a net €154 million spent in the last 3 years). Here’s a break-down of working capital, over the last 5 years:
[NB: For simplicity, all ratios are calculated in terms of total revenue.]
The magnitude & direction of the days outstanding ratios all look reasonable. Inventory days will continue to be dominated by an (ultra-short) fuel cycle, but expanded marginally to 9.4 days as Applegreen centralised distribution (to ensure consistent quality & selection across its estate) & introduced over 100 own-brand SKUs. More own-brand products (& perhaps more/cheaper overseas sourcing) will continue this trend, but also improve margins. [NB: Joint Fuels Terminal acquisition will presumably have no impact, as it’s 50% owned/controlled with Valero Energy & should remain unconsolidated]. Receivables days have expanded rapidly – but remain small in absolute terms, at 6.2 days – reflecting increased adoption of its corporate LowFuelcard, a trend likely to continue (albeit, more slowly). Applegreen earns lower fuel margin on this business, but it’s a compelling proposition in terms of improved customer footfall/loyalty, and recurring/incremental revenue. [As with its popular Applegreen Rewards card & social media campaigns (but with no working capital impact)]. And despite a substantial increase in payables days (to 42 days), it’s reasonable to expect further/offsetting improvement in payment terms – as store/food & beverage revenue increases as a % of total revenue, and Applegreen continues to extract better payment terms as a listed company & as its revenue/scale grows. But overall, continued revenue growth will remain the primary driver of incremental free cash flow/float.
As for underlying free cash flow – as some would call it, maintenance free cash flow (free cash flow a company generates after necessary spending required to maintain assets & remain in business) – here’s another look at the cash flow statement:
Applegreen’s 2016 net cash from operating activities was €48 million (inc. €17 million of incremental float), less net interest paid of €1.7 million, which threw off €46 million of available cash – whereas total net capex was actually €62 million, so free cash flow was actually €(16) million, increasing net debt to €19 million. But a majority of this capex was obviously new investment – to acquire, build & redevelop sites which, in the main, have typical useful lives of at least 15-20 years (e.g. freehold land/property, leasehold improvement & fuel storage infrastructure):
So I’m happy assuming maintenance capex was equal to the €11.2 million depreciation & amortisation charge in 2016 – in terms of actual cash maintenance spend, I suspect that’s conservative, considering the huge ramp-up in spending on new/redeveloped sites in recent years. And so, in 2016, Applegreen actually generated 34.8 million of underlying free cash flow.
Of course, cash flows are often volatile, so we need to ensure this figure’s actually representative of underlying cash earning power. The table above is the key: In terms of earnings, focus on EBITDA (pre/post-IPO net income is often unreliable), which boasts a smooth growth trajectory – you’ll notice underlying free cash flow & EBITDA are similar in 2016 (€35 v. €32 million), and then looking at respective cumulative 2012-2016 totals we note they are also incredibly similar over the last 5 years (€115 vs. €119 million), which confirms Applegreen’s underlying free cash flow in 2016 does correlate closely with its underlying earnings trajectory. [Also confirms underlying free cash flow’s averaged over 180% of net income].
Appreciating this correlation, and the underlying drivers of Applegreen’s working capital & float dynamics, is crucial. First, because a potential future cash flow shortfall – which can & will happen – look back over the last 5 years, the growth trajectory in underlying free cash cash flow’s undeniable, but it also includes plenty of yoy volatility. So you need to be confident the underlying cash/float drivers still remain in place. And second – and more importantly – there’s precious little sign the power of Applegreen’s float is appreciated by the average investor, judging by its current market valuation.
This is a flywheel:
Revenue growth generates increased float, which fuels increased investment, which fuels revenue growth, which generates increased float, and so on…
Ignore the 20.6 P/E – you can actually buy Applegreen for an absurdly cheap 11.4 times free cash flow!?
I mean, what are the risks here? The #deathofretail is irrelevant – petrol stations are specifically located in accessible high-traffic areas, to serve a busy/on-the-go consumer. A consumer who wants to fuel their car…and eat, drink, smoke and/or read right there in the store, or by the next set of traffic lights, or as they walk in their front door. And the #futureoftransport seems like opportunity as much as risk. Autonomous cars won’t change the equation – they’ll still need fuel, while people will still want & need rest-stops, convenience stores, and food & drink to go. [With more efficient fuel consumption likely being offset by greater speed?] And I believe the auto slice of the transport pie will expand hugely as ‘driving’ becomes a far more pleasant experience, and the young, old, disabled, etc. can safely commandeer vehicles. As for electric cars – they’ll remain an affluent urban novelty (& investment bubble!) for years to come – for example, plug-in cars now comprise a mere fraction of one percent of all UK registered cars. And in due course, petrol retailers will be thrilled to offer charging to customers while they have lunch & coffee, or charge them extra for a super-charging alternative!
[Plus, you have to consider how petrol forecourts might evolve – not to mention potential incremental revenue from ATMs, bike shops, pharmacies, dry-cleaning, (online) pick-up & drop-off points, etc. And in many locations, sites may end up being far more valuable as residential development.]
The main risk is old-fashioned declining revenue – which would impact margins & profitability, but also begin to unwind outstanding float. But how likely is that? As private equity has finally noticed in the UK, the sector’s virtually bullet-proof. [It’s a reliable cash generator, it’s backed up by potentially valuable freehold property, and it’s still ripe for (re)development]. How else did so many small/single-store operators survive, in spite of the odds!? And Applegreen boasts a unique & compelling customer proposition, expanding margins (driven by the increasing emphasis on store and food & beverage offerings), great LFL revenue momentum, plenty of incremental branding and food & beverage expansion potential within its current estate, a truly unlimited opportunity in terms of potential market penetration (look at the UK – its sites aren’t even 1% of the market yet!), while management boasts a 20%+ RoCE target. And presuming Applegreen can maintain its current pre-capex cash flow (of €46 million), and also grow it in line with revenues, there’s basically no funding constraint on maintaining its current rate of investment spending (on average, €51 million net capex annually in the last 3 years).
[Applegreen also has spare debt capacity. However, I’m conscious of current operating lease payments of €13.8 million – about 22% of the €63 million cash generated from operations plus operating lease payments (essentially, an EBITDAR equivalent). In terms of potential operating lease payments & net interest paid, I’d prefer to see this ratio limited to 25-30%, which would imply a 2.7 times EBITDA net debt limit. NB: Applegreen has no legal/pension/deferred consideration liabilities. Nor any oil pricing/hedging risk – price changes are automatically passed on to the consumer (demand’s relatively price-inelastic, but consumption is sensitive to economic growth).]
Hence, the fly-wheel continues…
Bearing in mind Applegreen’s more recent 20% CAGR in EBITDA & a long-term 30-35%+ CAGR in revenue/EBITDA since launching the Applegreen brand in 2005, its current market multiple’s certainly justified. But only if it’s based on underlying free cash flow – i.e. in round numbers, a 20.0 P/FCF Fair Value multiple:
EUR 34.8 million Underlying Free Cash Flow * 20.0 P/FCF / 81 Million Shares = EUR 8.61 per share
A EUR 8.61 Fair Value per Share estimate would imply a current Upside Potential of 76% for Applegreen.
And I’m encouraged by the recent price activity – the stock finally looks like it’s on the verge of challenging key resistance at EUR 4.90-5.00 (for much of the last two years). If that level does break, I’d anticipate an easy rally to new all-time highs. [Average daily Dublin/London volume’s around €150 K (note the UK ticker trades in sterling), but a fresh rally/dose of positive sentiment would likely see 2015 average daily volume of €550 K restored]. But for long-term investors, the real growth potential in Applegreen shares will depend on its owner-operators, as they successfully execute & repeat their operating strategy, and continue to exploit their unique flywheel of revenue, profits & float, investment, more revenue, more profits & float, more investment, and so on…
I have a 6.2% portfolio holding in Applegreen plc (APGN:ID) (APGN:LN)
- Applegreen plc: EUR 4.90 per Share
- Market Cap: EUR 396 Million
- P/E Ratio: 20.6 (based on consensus 2017 EPS)
- P/FCF Ratio: 11.4
- Target Fair Value: EUR 8.61 per Share
- Target Mkt Cap: EUR 696 Million
- Target P/FCF Ratio: 20.0
- Upside Potential: 76%
Wexboy 
Hi Wexboy,
Great write-up! I have only recently come across your articles and am working my way through them. Your work on Digicel is my personal favourite so far (Denis O’Brien…dual share classes…related party transactions…why am I not surprised!!)
Underlying operating free cash flow is increasingly a metric which I am trying to incorporate into my own analysis. However, I have been having some difficulty reconciling the changes in working capital items as per the balance sheet with that stated in the cash flow statement.
Now I am aware that these numbers do not always exactly match given differing FX rates used in the balance sheet vs the cash flow statement, estimates of bad debts within receivables etc. However, I am struggling to reconcile the “Increase in trade payables” line in Applegreen’s full-year 2016 cash flow statement to the “trade and other payables” lines on the balance sheet.
For example, the Trade and other payables balance under current liabilities for 2016 is 130,948 and for 2015 it is 113,246, which suggests a +17,702 increase in current trade and other payables during 2016 vs the prior year (I am aware there are non-current trade and payables but the y/y change is marginal).
However, the “Increase in trade payables” as per the cash flow statement is +28,923. This is 11,221 higher than the change implied on the balance sheet. I have looked at note 20 on trade and other payables in the accounts but I am still left somewhat confused as to the magnitude of the discrepancy (there are similar differences between the inventory and receivables lines in the balance sheet and cash flow statement but they not as large).
Using the balance sheet change in trade payables rather than the number used in the cash flow statement would reduce the cash inflow from incremental float from €17m to €6m, thereby reducing the estimate of underlying free cash flow to €23.8m from €34.8m. Given the 20x P/FCF multiple applied (why 20x might I add? In line with your assumed growth rate for the business?), this would reduce your price target from €8.61 (20x P/FCF * 34.8m underlying FCF / 81m shares) to €4.76 (20x P/FCF * 23.8m underlying FCF / 81m shares). This would have resulted in the shares being modestly overvalued to the then share price rather than the significant +76% upside using your estimates.
Scratching my head trying to reconcile the numbers…feel like I’m missing something very obvious…would appreciate any help you can provide.
Thanks in advance.
Shane
Hi Shane,
Thanks!
Digicel: Yeah, the prospectus was even more of a horror show than I’d expected – I’m glad I published the piece when I did. Irish media may have piled on after the IPO was pulled, but there wasn’t actually a peep of doubt out of them before that…I felt like a lone soldier sticking my head above the parapet, wondering if one of REDACTED’s goons was lining me up in his sights!
Applegreen:
I blame the accounting textbooks…they present perfect little examples of cash flow vs. balance sheet reconciliation, then everybody struggles to find anything so nice & neat in the real world!?
Which reminds me, let me offer an important/general financial analysis tip: It’s obvious, but people repeatedly under-estimate volatility of figures which are the net of much larger/annual cashflows/transactions balances…I always had to keep reminding any CEO/CFOs I worked with about this. For example, say this month you report a key figure is 50 – the net of two large gross figures, say +1000 & -950. Next month, you report the figure’s now 100, a 100% swing, so everybody in the room has a fit…til you point out it’s only a 5% swing gross, i.e. the underlying figures are now +1050 & -950!
As regard Applegreen cash flow reconciliation:
– You know the overall cash flow statement makes sense – i.e. yoy change in cash & cash equivalents obviously reconciles.
– It can be dangerous to just cherry-pick one favourable (or unfavourable) variance, you also have to take a holistic view.
– Balance sheet would also suggest net PPE/intangibles spend should be about 14M less than the 62 M you actually see in cash flow. Dig into this, and you’ll note it’s driven by an 11M balance sheet translation adjustment.
– The rest of the cash flow statement is mostly a wash, so you know the other big offset is a translation adjustment in payables.
– Sterling weakness is the big driver in both instances.
More generally:
– Cash flow, by definition, is potentially far more volatile than net income. So while it’s ultimately superior for valuation purposes, you can’t necessarily on a single cash flow statement – it could be an outlier – so it’s always important to evaluate in terms of the prior year & also the longer term trajectory of annual cash flows.
– If you identify a sustained/unusual cash flow trend/variance, obviously it’s important to understand what’s really driving it – i.e. triangulate it back against the balance sheet, and the real world operating dynamics of the business.
With Applegreen, I also confirmed underlying FCF by looking at the multi-year trend in cash flow, identifying the unique characteristics of the petrol/convenience retailing model, and mapping out the resulting trajectory in terms of working capital Days Sales Outstanding stats. So yes, I’m happy with Applegreen’s cashflow & my underlying FCF valuation.
Cheers,
Wexboy
Hi Wexboy,
Thanks for getting back to me so quickly. I got your message during the Liverpool game yesterday – provided me with a nice distraction from what was a terrible result!!
I couldn’t agree more with your point on accounting and finance textbooks! Do you have any suggestions on some good books/blogs that provide more practical examples of financial statement analysis (apart from the Wexboy blog of course)? I do find the material that Aswath Damordan produces very useful, although do I run the risk of overly idealised examples being used??
I see your point on the delta between net PP&E/intangibles as per the balance sheet and the CF statement and the associated translation adjustment in the notes. I was able to back out your numbers this morning so thanks again.
The run-rate in working capital float over the past 4 years is interesting: +€16.8m in 2016, +€8.5m 2015, +€8.3m 2013, +€15.9m 2013. Within this, the payables number looks most volatile y/y, elevated in 2016 and 2013 compared to the 2 interim years (this seems to coincide with GBP weakness compared to the prior year which backs up your point on the GBP translation adjustment). I suppose the question is what gives you comfort that the run-rate for WC flat is closer to the €16m level in 2016 and 2013 compared to the €8.5m level in 2014 and 2015.
Btw, I don’t doubt your underlying FCF estimates in the slightest, particularly given how well they correlate with adjusted EBITDA. Just trying to understand the thought process. The call has obviously been great as the share price performance since your post speaks for itself (interesting capital raise on Friday….)
At the risk of asking too many questions in a single post but……what is your view on DCF valuations more broadly? Is it something you would put much weight on or do you view them as being too sensitive to the required inputs?
I like the simplicity of your P/S methodology (having read the DCC piece) but this seems most suitable for mature and/or cyclical companies (?). Does a DCF valuation provide more scope to capture future growth in a valuation compared to the P/S method in your view?
Thanks again – Shane
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Hi,
Thanks for the great write up. I have found it impossible to get hold of any shares on the LSE, could I ask what broker are you accessing the London/Dublin listings?
Thanks
Josh
Hi Josh,
IIRC, average London volume is about 75% of Dublin volume…but I agree, it seems particularly bad now (I sometimes think market-makers reduce volume not increase it!).
Davys & Goodbodys are the two main Irish brokers – and remember Dublin is an order driven market, which can be useful if you have the patience.
Good luck,
Wexboy
Thanks for a great write up!
Whats your comment on the vast increase in share count the last couple of years? The growth is a bit less impressive and it could be seen as a worrying sign.
Hi Fred – Applegreen’s O/S share count has increased by just 2.5% since its IPO.
Hi,
In the last AR Note 6 the share count is 80” compared tod 70” in 2015. Or am I missing anything?
In Note 6, 2015 weighted average share count includes H1-2015 pre-IPO period/share count, so not relevant – focus on Note. 22.
Sorry for that. Once again, great read and finding!
Great post. Playing devil’s advocate, fuel margins are at historical highs due in large part to the declining oil price – as the oil price comes down these operators do not pass on the savings immediately which leads to over-earning on the fuel side. If you normalise the fuel margins the implied multiple can start to look less attractive, and to the extent the market does not expect mean reversion in terms of fuel margins this could lead to a nasty surprise. It is no coincidence many of Applegreen’s competitors have been recently sold as the founders are taking advantage of peak multiples on peak earnings.
Also part of the reason oil majors divested these businesses in the first place is they are low margin, low return on capital businesses. Maintenance capex tends to be understated as these companies underspend on things like fuel tank replacement in an unsustainable fashion longer term. The U.K. market is very overbid due to PE backed companies competing for M&A fuelled growth so market share there will not be attained easily or cheaply.
Interesting stock though with undeniable owner-operator angle!
Thanks Daniel,
Good questions – I didn’t overly focus on fuel margin, as I didn’t want to set off the conspiracy theorists! Alas, I failed, they definitely found me in the last week…I’ll spare you the details:
– Journos would love it to be true, but in general fuel price gouging’s more consumer myth than reality…in fact, Bob Etchingham highlights consumer irrationality re petrol prices as a key inspiration behind Applegreen’s fuel price promise – see from 11:50 here: https://www.youtube.com/watch?v=8qWBrzQjIQI A key driver, of course, is the fact that taxes comprise a majority of retail fuel prices in Europe – which consumers prefer to forget/ignore – so they see oil price headlines, then feel ripped off at the pump when prices only fall a fraction of the oil price decline. [Whereas in the US low-tax gas prices go up & down like a stripper’s knickers, but consumers still complain… which just proves my point!]
– And I don’t see it in Applegreen’s figures – the oil price collapsed in 2014/2015, but its fuel margin only increased from 4.8% in 2012 to 5.7% in 2016, with presumably a decent portion of that coming from increasing scale/buying power. So I think any potential contraction in fuel margins, on higher oil prices, is relatively limited – particularly with only a little over a third (& falling) of Applegreen’s gross profit now derived from fuel. Not to mention, the float implications of higher oil/petrol prices would be attractive.
– As regards chains selling out, I think we all know why Denis O’Brien sold Topaz..!? As for PE firms, they tend to identify specific sectors/verticals, then target potential acquisition targets – so they may well have been the instigators of the UK PE deals I highlighted (for example, TDR Capital owned EFR since 2014, before merging it with Euro Garages last year).
– Petrol stations under the majors were a v different retail/margin/return proposition – a focus on improving margins/return via food & beverage and convenience retailing is becoming far more obvious now, but it was always going to be difficult for the oil majors to re-imagine themselves as ‘retailers who also sell fuel’. And despite the economics, that isn’t actually what their shareholders were looking for anyway – since the 80s, companies have been increasingly rewarded for focus, rather than diworsification.
– I wouldn’t disagree the UK’s probably the toughest petrol retailing market – in terms of market concentration & site acquisition/competition. But Applegreen still has a sub-1% UK share, so I don’t see its growth being held back in the near/medium-term, as long it remains nimble & cherry-picks its sites. Personally, I think the US is the better opportunity ultimately, but I’d agree with Applegreen’s cautious entry & expansion there to date – they need to walk before they run, and certainly don’t want to scare off investors who might otherwise think they’re getting in over their heads. Which I think explains their dual US/UK expansion strategy right now.
Cheers,
Wexboy
Would agree to disagree on whether ‘rocket and feather’ pricing is real, though note that conclusions of various regulatory investigations is pretty inconclusive which supports your thesis. I see Applegreen gross profit margin increasing from 4.4% to 5.7% between 2013 to 2016 which corresponds with oil price falling c.$110 to $37 by the end of 2015 (which would have an impact on H1 2016). Assuming this difference is due to the oil price [maybe a big assumption!] implies c.EUR 11m of Applegreen EBITDA [5.7% – 4.4% x EUR 937.5m of fuel revenue 2016A] is from over-earning on the fuel side which is pretty significant on a c.EUR 31m LTM EBITDA / c.EUR 38m 2017E company (c.30% of EBITDA).
Some of the fuel margin expansion will be from better fuel supply deals, but these tend of be 5 year deals so you don’t necessarily benefit from incremental margin every year (although different baskets of sites can have different fuel supply agreements which could be up for renewal at different times).
One aspect I don’t have a view on is the impact of increasing MSA exposure – these will earn structurally higher fuel margins than normal stations which could explain some of the margin expansion.
Hi Daniel,
We can only see back as far as 2012, in terms of fuel gross margin – so I think it’s fair to use 4.8% vs. 5.7%, which would be more like an 8M differential on EUR 937.5M of 2016 fuel revenue. I think it can be a little dangerous ‘stress-testing’ a single component & presuming the resulting impact (plus or minus) drops straight to the bottom line – there’s always lots of moving/reactive parts in any business model. But you still have a good point, particularly if you have a firm view on oil prices. However, if you do believe in Applegreen’s growth story, any reversal in fuel margin is unlikely to mean a reduction in actual fuel gross profit (model higher revenue numbers & you’ll see that), though obviously it would affect its earnings growth trajectory.
You can also expect improved float economics & continued scale/buying benefits as an offset – Applegreen itself buys wholesale (and in Ireland, will shortly be buying direct from the refineries), it does not have fuel supply agreements in place. But obviously it may have acquired stations along the way (but note it acquired piecemeal, not baskets/chains of sites) despite them having agreements in place – obviously many have expired since 2012. Overall, I think it’s reasonable to assume a reasonable portion of the increase in fuel margin is actually due to increasing scale.
Considering the timing of their MSA roll-out to date, and presuming better fuel margins, I think that may be a possible tailwind to come – but overall, I think it’s better to presume no relief on fuel margins, as Applegreen & its larger peers continue to use it as a tool to drive traffic to their retail proposition. [Just as background: There was & can be a government sensitivity to petrol price competition, in Ireland for example – it obviously benefits the consumer, but was often viewed as unfair/predatory behaviour driving small/local petrol stations out of business. I don’t expect you’ll see much of that behaviour any more – the larger chains are ultimately competing now via their store and food & beverage offerings, which smaller owners/chains can’t hope to compete with (& the larger chains know they won’t catch flak for that)].
And going back to having a view on oil prices, I certainly wouldn’t discount the idea of also having other exposure in my portfolio to higher oil prices!
Regards,
Wexboy
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is there any preference for London or Dublin shares?? ( are there any dividends ?)
Dublin volume’s better – and it’s order-driven, so you can potentially beat the spread or even do a bit of market-making, if you have the patience (& presuming your broker offers it). Didn’t bother mention their dividend yield – it’s just 0.25%, as the focus is on investment – they really shouldn’t have bothered!
Can you see the open orders for applegreen anywhere if it’s order driven? Is this through your broker?
Hi Eoghan – you’ll only see best bid/offer – here, for example: http://ise.ie/Market-Data-Announcements/Companies/Equity-Details/?equity=2015121 You’ll have to pay to see full order book, unless you have an online broker who actually provides the data for free (probably not). But if you have a full-service broker (i.e. you can deal by phone with him), he can obviously tell you what he sees outstanding on the order book.
I think you are wrong on electric car roll out speed. If they stop for petrol then pick up food they will stop less with an electric car – once they get to decent range. This undermines it a bit…
I like the article though and the thinking behind it.
Cheers, mate.
– Let’s not forget Ireland’s enthusiasm for LPG in the 80s: https://en.wikipedia.org/wiki/Autogas#Ireland [Actually, my mother was one of those enthusiasts…I distinctly remember worrying she’d get blown up!] Decades later, it’s still mostly hype…
– True scale will require people buying EVs with real money…not OPM, i.e. if you strip out charitable/corporate/government/tax subsidised buying, how large is underlying demand? What people say isn’t the same as what they do…and today, when people pull out their own wallet, they tend to buy something cheaper than an EV, or else the biggest/most powerful vehicle they can afford.
– I also have to wonder what % of EVs will remain confined to affluent city dwellers, who tend to drive within a relatively limited urban radius – which is becoming less & less of a target market for petrol retailers anyway.
But even if you debate wildly differing EV-adoption forecasts, I’m not sure it matters all that much in the medium-term, as:
– The same forecasters are predicting continued/significant growth in annual production globally over the next 20 years – EV will grab X% (whether it’s high/low) of the pie, but it’s an expanding pie. So any of the forecasts I’ve seen actually predict annual ICE production as stable/expanding over the next 10-20 years.
– And, more importantly, the EV % of annual production is v different when you consider it in terms of actual cars on the road. The average car, in America for example, is now 11 years old – the current ICE fleet will remain on the road for many years to come, and 99% of the new cars sold even just this year will remain on the road for the next two decades. So any headline forecasts you see for EV sales in Year X are much much smaller in terms of total fleet.
Also, we can’t just focus on one trend (EV adoption)…petrol retailers will continue to change & adapt, as will consumers’ spending habits & patterns. Which, of course, is why forecasters cock it up so often – they tend to cherry-pick & extrapolate one trend/metric, but ignore its dynamic interaction with other trends.
In most (but obviously not all) instances, I think trying to forecast the future is much like forecasting economic growth – a difficult, frustrating & often pointless exercise for investors – far better to focus on the best companies & management teams. And I think this is particularly true of retailing – where moats are inevitably minimal, or non-existent, since everybody copies everybody. You have to bet on a management team that’s proven it can consistently innovate, execute & deliver over the years.
And that’s the primary reason I’m betting on Applegreen – clearly, they pioneered a new/unique petrol retailing model in Ireland, they’re open to global retailing ideas & approaches, they racked up an incredible track record of growth in a harsh economic environment, and as owner-operators they have a huge amount of skin in the game here.
Thanks for sharing the interesting write-up.
On the EV theme, this article is fairly interesting, it’s based on a report which paints a picture where rapid take-up could occur due to self-driving technology making it much cheaper to get a self-driving taxi than to use your existing car.
https://www.fastcompany.com/40424452/it-could-be-10-times-cheaper-to-take-electric-robo-taxis-than-to-own-a-car-by-2030
It’s quite out there, as theories go, and therefore quite difficult to incorporate into analysis today. But in the longer term it will be interesting to see how quickly things change!
Great, thanks Alan, I’ll have a read. But note my view that autonomous cars (whoever owns or operates them) don’t necessarily pose an obvious risk overall. You can argue both the possible pluses & minuses, but I suspect autonomous driving will expand the transport pie & the driving share of the pie – and more fuel miles & more consumers on the road ultimately looks attractive to fuel stations.
Float based on your defintion is increasing account payables and keeping account receivables as low as possible? So you hold a larger amount of cash for a longer period of time?
This said cash “net owed” can be used to fund growth is what you are saying?
This is a very dangerous way to operate your business as opposed to a standard Long term debt. Sure the cost of capital may be zero if you assume continued cash flow coming in, but a small drop in revenues/cash flow or increase in trade receivable days, means you now owe a lot of money.
If they are growing slowly, the float has more value to me then if they are growing fast, because they could have no margin of safety in cash management otherwise…
Hi banjomano,
Correct, a consistent/increasing negative working capital position (i.e. float) can effectively offer permanent financing. And yes, you highlight the classic risk of float, particularly retail float: It can start to unwind (i.e. become a steady cash outflow) if your working capital ratios deteriorate & (more critically) your revenues start to decline. That’s why I spent so much time focusing on the unique characteristics of the petrol (& food) retailing model…by default, it generates float.
As for Applegreen itself, it boasts world class same-store sales growth, it enjoys a significant tailwind today from its recent investment surge in investment, and it has unlimited potential in terms of market share/opportunity. [In Ireland, it has just 50% of the leading market share, while in the UK & US its current market share’s immaterial]. Therefore, the most likely constraint is capital to keep funding investment & generate continued revenue growth – but as I’ve noted, I’m confident Applegreen’s operating cash generation, its increasing float, and its surplus debt capacity, are more than sufficient to keep underwriting its current investment spend & revenue growth. It’s a flywheel of investment, revenue, profits & float, increased investment, increased revenue, and repeat…
[I’ve highlighted Applegreen’s extraordinary growth trajectory since 2005, but check out its (mostly pre-IPO) annual reports on the website – they stretch back eight years, and they confirm Applegreen’s actually generated incremental negative working capital every single year (increasing float from EUR 15M to 86M).]
Regards,
Wexboy
It looks like they are operating all those Subway, Costa and Burger King outlets themselves. (see slide 23 in http://www.zonebourse.com/APPLEGREEN-PLC-22619508/pdf/572068/Applegreen%20PLC_Slide-show-presentation-semestres.pdf)
I am wondering if they can negotiate better conditions with the franchisors given their size.
Hi Stefan,
Yes. It’s pretty standard for franchisors to offer sliding fee scales/incentives for larger franchisees – so that may already be helping margins, depending on the franchise.
Perhaps what’s really exciting is the idea of effectively locking up a franchise (or maybe sharing it with just one/two other large operators) – as I noted, small operators will be increasingly challenged in terms of the investment required in today’s market, but they may also have real difficulty even attracting a potential franchise partner.
And locking up a smaller/premium franchise might be really compelling – consider all the hoopla around Dermot Desmond’s boys winning the Five Guys franchise in Ireland: http://www.irishtimes.com/business/commercial-property/dermot-desmond-s-sons-to-bring-five-guys-to-ireland-1.2081479 I could see Applegreen possibly winning something like this in the future (as they could potentially offer a much wider & faster roll-out than most other ‘bidders’ for a franchise), and even sub-franchising out non-petrol sites.
Cheers,
Wexboy
How do you think about valuation if new store growth stopped i.e. steady-state? Take out the float increase from NWC (~16m) and it generated 31m in CFOPS. Subtract out your 11m in D&A and that’s 20m in FCF. Is that attractive on a ~400m market cap?
And what about the returns taking into account capitalized leases? Take that 20m in FCF / NOPAT, on ~180m of invested capital (w/ leases capitalized at 7x) = 11% ROIC even with a large negative NWC balance. Is 11% ROIC that really a great business?
I get the float-funded growth angle, but would be concerned if growth stops… Autonomous cars = faster speeds = fewer stops at station (if i can travel 100mph direct to destination quickly, why stop on the highway?) And electric vehicles = charging reqs = significant capex to overhaul existing stations – who pays for that and at what returns?
Liked the write-up, so curious as to your thoughts?
Thanks AVI,
Of course – if you don’t believe in (or worry about) the growth story here, Applegreen clearly won’t be an appealing stock. But if you are impressed by its growth trajectory & prospects, you’ll probably view its 20.6 P/E ratio as relatively fair – certainly not cheap, but not extraordinarily expensive either. [And judging by the share price over the last year or two, that obviously seems to be the general market perspective & consensus]. And if you actually see a flywheel of revenue, cashflow & incremental float, investment, more revenue, etc. operating here, Applegreen is arguably (dirt) cheap. As with any stock – esp. retail – if you don’t think the story’s robust enough, it’s easier just to move on to other stocks/sectors.
Can’t quite reconcile your numbers – but taking same approach as the company (i.e. averaging, see p.119 & p. 34 of latest annual report), I can reconcile to their latest ROCE of 18%:
[fyi I don’t necessarily fully agree with capitalising operating leases (what about other commitments…shouldn’t they be capitalised too?), but obviously I do focus on interest & operating lease coverage as a key risk metric.]
– So I get 107M of average equity, 12M of net debt & 97M of capitalised leases (your 7x multiple makes sense), so that’s 215M of invested capital/capital employed. Adjusted EBIT is 21M, plus 14 M of operating lease expense – tax-effected at 12%, that’s 31M, for a 14.2% ROIC (with leases capitalised)
– I’d agree with management’s assertion that ‘much of the capital expenditure in recent years focused on larger infrastructure projects which take a longer time to reach maturity in their returns’, so I think underlying ROCE is a few % higher (though that may still remain offset by continued investment) & management’s 20%+ ROCE target continues to make sense. Therefore, I think underlying lease-capitalised ROIC is also a few % higher than the 14.2% you see here – all in all, whichever number(s) you focus on, pretty impressive I think for what is still ultimately a property-based investment.
Again, see my rjmahan reply re EVs.
Cheers,
Wexboy
Interesting write-up, thanks for posting.
Two thoughts…
1) Improvements in batteries (cars that can go all day without re-charging and get plugged in nightly like an iPhone) + autonomous vehicles will re-shape this whole business in ways I don’t think are that easy to predict right now. I wouldn’t kill the investment over this, but I don’t think the risk/uncertainty can be glossed over — electric cars shouldn’t be dismissed as an “affluent urban novelty”. Impact probably less on highway service areas (quick snack / coffee + bathroom break) but the other filling stations could look old fast (think Blockbuster video in 1995 vs. 2010). Those filling stations would be left to compete on food / convenience store aspects or other retail, have fun with that.
2) Disclaimer, I’m an American and probably a somewhat biased one…
* In the words of Jack Black (https://www.youtube.com/watch?v=AWUWmM8vroM), Americans like to eat, is that such a crime? The fact is you can get healthy food at a Wawa (definitely unhealthy food too).
* I am going to try to put this delicately since I love Ireland and its people. No American sees Irish branding (or UK for that matter) and thinks, “Oh, I bet there is good food in there.” Attaching a Burger King (people still eat at these?) and/or a Subway (a national disgrace, worst sandwich in America), Lord have mercy. I see Wawa and Sheetz eating Applegreen alive over here. Also, I don’t think the name “Applegreen” works in America — not sure how to explain that, but I really don’t think it does. You need your branding “A” game in the US for whatever reason.
Aside from this (and I mean this in all sincerity), I think this is an interesting idea if enough one ft hurdle growth opps exist regionally (I not sure those will be easily found in US though). Good management with skin in the game and at a reasonable price. You can do much worse in this market. Thanks again for you posts here, I enjoy the blog.
Thanks Thomas,
1) ‘Affluent urban novelty’:
I didn’t recognise my words there, at first…originally, I wrote ‘virtue-signaling toys for the urban affluent’. But anyway, please see my reply above to rjmahan – I think debating the speed & scale of EV up-take is a red herring for a long time to come in terms of total car fleet on the road. Same for autonomous cars (which is obviously far more challenging for society/government to deal with), but I do think they provide as much opportunity (a much much larger pie) as risk for petrol retailers longer-term.
2) If any of my American readers were offended by this phrase:
‘…not eating & drinking, like Yanks do every bloody 20 miles’
Apologies…in reality, I was poking fun here at Irish gombeen politics.
And apologies to US single-store operators too – here’s how I described your stores:
‘Take a large box, add some parking, add plenty of salt, sugar & fat, mix briskly, sprinkle with some local white trash, bake, then set down on the bad side of town…’
From my own personal (& reasonably broad) experience over the years, that description’s entirely & ridiculously accurate. But now I realise I’ve probably scared off some future customers – tsk tsk, my bad… As for US readers: Uhoh, next time you’re skeeved out/hopped up on sugar in an awful gas station, you’ll remember me!
As regards competing head-to-head with Wawa & Sheetz, I believe Applegreen’s well up to the challenge – but that’s not the goal here anyway. Once they figure out their offering & strategy in the US, Etchingham & Barrett could spend a lifetime lining up one foot hurdles to tackle – i.e. taking out/competing with the 10s of thousands of single/small-store operators who still comprise a majority of the sector.
Regards & please come visit:
http://www.independent.ie/editorial/StoryPlus/behind-the-doors-of-big-houses-in-relands-ancient-east/
Wexboy
Wexboy, very good writeup, and I’ve bought a small position of the London based shares. I read this about a month after your post and price moved a bit, so I’d like to buy more at a bit more of a bargain.
I’m from US. Having stopped a few times the past couple of years in Irish “fillin stations” (didn’t pay attention to brand unfortunately), I feel there is no comparison with a Wawa, much better quality and impression, tho also larger footprint.Thomas Bachrach is right, will require some education in the states for people to think “good food” when they think “Ireland”. A lot of people here had Irish Moms and grandmoms and they have a hard time accepting the recent revolution in cuisine quality in Ireland. (Sorry, Mom).
I see that almost all US expansion has been in Massachusetts, where I live. There aren’t many Wawas here, so seems like a good place to start.
Thanks blades,
Well, Applegreen’s a pioneer in the Irish market, and Topaz came late to the party (in terms of redevelopment & enhanced food offerings), so your experience of the average filling station in Ireland could easily have been single owner operations, which I’d agree probably seem crap compared to a Wawa. But don’t forget, my horrified impressions of US gas stations (again, I didn’t notice the brand) are also based on similar experience over a number of years & a fair number of states. So I think we cancel out..!
And there are a lot of misconceptions about national cuisines. I think you’ll agree the average American (Irish or not, who has maybe never visited Ireland) probably has a somewhat bizarre idea of what Irish people eat day-to-day. As for America itself, there’s a growing/respected (domestic) school of thought which argues there is NO national cuisine – it’s an array of regional & heavily immigrant-influenced cuisines. I don’t think that’s fair – excluding the obvious immigrant influences (in the US), I think the home cooking of equivalent Irish & American households is actually v similar – it’s your typical meat & two veg dinner. As for fond & not so fond memories of Mom & Grandma’s cooking, I’m not sure that’s so reliable/relevant…in fact, I’m somewhat bemused that almost every American I meet seems to rave about their Grandma’s one-of-a-kind meatball recipe…regardless of ethnicity!?
But anyway, the purpose of that last rabbit hole – sorry, paragraph – was to serve as a reminder national cuisines are pretty much an irrelevant topic when it comes to petrol stations. Applegreen does boast a quality food offering, but obviously that doesn’t mean it’s boasting some kind of culinary/foodie delight – in the context of a petrol station, it actually means a hot, fresh & diverse food offering.
Presume you’ve seen their SC chain acquisition since? https://investegate.co.uk/applegreen-plc–apgn-/rns/acquisition-of-us-forecourt-operation/201707060700032340K/ Price looks right…and it’s an estate/retail offering that’s quite familiar/similar to the Applegreen model/approach, yet offers opportunities for enhancement.
Cheers,
Wexboy
Great analysis! There is also nice interview with Joe Barrett from 2015:
https://itunes.apple.com/at/podcast/joe-barrett-owner-of-petrogas-applegreen/id454701148
What gives you confidence that a new entrant can’t take away their business? I am still struggeling to really understand why their growth cannot be stopped by an existing or new competitor.
Excellent – I tweeted that podcast.
Good question(s) – some thoughts:
– There won’t be new entrants in the sector per se, as the sector will continue to shrink in terms of total petrol stations – but obviously there will be continued consolidation. In the UK, with the supermarkets now in defensive mode, that will likely be driven by the three private equity vehicles I highlighted. In Ireland, it’s heading towards a duopoly…and with Topaz now owned by Couche-Tard now, Applegreen may actually be a possible takeover/merger target for one of those UK PE firms. As for the US, I’m gobsmacked at the level of fragmentation we still see today.
– I don’t expect a new wave of petrol price competition, as the bigger/most savvy players are now primarily focused on investing & competing via their food & retail offerings – and I believe Applegreen boasts an equal/superior offering in that respect.
– And even if you paint a scenario where Applegreen ends up facing an array of smaller/more nimble as well as much larger/more aggressive competitors, the sector’s still all about location – which explains how so many single-store operators have survived & thrived this long – which still presents opportunity for Applegreen to continue carving out share for the foreseeable future in the UK/US, where it has a negligible presence.
But in the end, your question will always be valid, regardless – because it’s retailing, and as I said above:
‘moats are inevitably minimal, or non-existent, since everybody copies everybody. You have to bet on a management team that’s proven it can consistently innovate, execute & deliver over the years.
And that’s the primary reason I’m betting on Applegreen – clearly, they pioneered a new/unique petrol retailing model in Ireland, they’re open to global retailing ideas & approaches, they racked up an incredible track record of growth in a harsh economic environment, and as owner-operators they have a huge amount of skin in the game here.’
Love this analysis!
Thanks, Darragh K – keep reading!
Great article, well worth the read.
Cheers, Ross!