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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:

2016 Annual Report

2015 Annual Report

2014 Annual Report

[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%
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