This week has only one full trading day behind it, Monday. But that was enough to get Parkland Corp. (TSX:PKI) to rise more than 5%. What’s behind this rise in Parkland stock and what should investors do about it?
Let’s explore.
Shareholder activism: Parkland stock rises amid calls for a strategic review
It’s no secret that Parkland stock has suffered from underperformance in the last five years. While the TSX has rallied approximately 30%, Parkland is flat today versus five years ago.
Two things are worth noting with regard to this. The first is that the stock actually performed exceptionally well in the prior five years. From April 2014 to April 2019, the stock rallied 87%. The second is the fact that Parkland shares are grossly undervalued.
As a result of this underperformance, Parkland’s largest shareholder, Simpson Oil, is calling for the company to consider a potential sale of the business. Simpson Oil, which owns 20% of Parkland’s shares outstanding, believes that something has to happen to “optimize Parkland’s operational and financial performance”. Thus, it wants strategic alternatives to be considered.
On the one hand, Simpson Oil has a point. Years of focusing on growth and acquisitions have given Parkland scale. However, it’s also given the company a heavy debt load and inefficiencies. The strategic review was initiated because of this very fact. After years of acquisitions, the international fuel distributor and retailer hit a point where synergies were not being realized as expected and as hoped.
But Parkland has hit back at Simpson’s call to sell the company as a move that would be against the interest of the majority of shareholders. Therefore, they are carrying on with their path to shareholder value creation.
Parkland looks for synergies and efficiencies
Management at Parkland has already stated that the days of their aggressive acquisition strategy are over, at least for now. Today, the focus is on delivering organic growth, synergies, and debt reduction.
In its latest quarter, Q4 2023, adjusted EBITDA increased 1.8% to $463 million. This was significantly impacted by the unplanned shutdown of the Burnaby refinery. For the full year 2023, adjusted EBITDA rose 18% to $1.9 billion. This was also impacted by the unplanned shutdown of the Burnaby refinery, but it was offset by very strong results in other segments. For example, EBITDA in the international segment increased 77% to $678 million. Also, Parkland’s renewables business doubled year over year.
During 2023, Parkland achieved cost savings, driven by streamlining processes and increased efficiencies. Also, 2023 saw significant organic growth in the international and Canadian segments. The Canadian segment benefited from expansion of the On The Run brand to more than 700 stores. The International segment benefited from higher organic growth as the commercial business saw significantly higher volumes and the Jamaica acquisition achieved synergies.
The bottom line
Shareholder activism is almost always a good thing. It’s often the catalyst to value creation, as it shakes management up to take action.
Parkland stock has reacted to what investors believe will be better days ahead. The company has already made strides in reducing its leverage and efficiencies are rolling in. Also, the valuation remains quite low considering the strong cash flows that the business generates.
