Parkland's Tank Is Full

09/01/2010 12:18 pm EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

The fuel distributor will maintain a high-octane yield after converting from a trust to corporation, writes Roger Conrad in Canadian Edge.

Chances are you haven’t heard of Parkland Income Fund (Toronto: PKI-U, OTC: PKIUF) unless your business has purchased fuel products in the back country of western Canada. But the company now operates a profitable niche of 622 multibranded convenience stores and wholesale distribution centers in rural areas coast to coast, stretching into remote reaches of the Yukon and Northwest Territories.

The company’s commercial business supplies bulk fuel, propane, heating oil, lubricants, industrial fuels, and agricultural inputs under a half-dozen popular brands. And it provides contract processing services for specialty petroleum products as well.

[Parkland has] clearly proved its ability to grow consistently in the toughest of environments. The acquisition of Bluewave Energy earlier this year, for example, made the company the largest independent fuel marketer in Canada. And the implementation of a new integration system promises more deals as well as internal savings and synergies.

[The trust currently yields] 11.8%. And the current distribution rate is set to hold [through the end] of the year, when [Parkland] will convert to a corporation. After that, Parkland has set a target payout of 75% to 110% of its current monthly rate of C$0.105. As a result, it will pay out at least 8.9%, possibly as much as 13%, based on its current price.

Parkland’s first-quarter cash flow was clipped 32%, owing mainly to seasonal factors affecting margins and weather. Volumes, however, rose 21%, to 5% of total Canadian consumption. That reflects the pace of recent acquisitions, which have recently extended into Ontario and Atlantic Canada via the Bluewave deal. And it will translate into surging cash flow as the North American economy recovers and weather patterns normalize.

Meanwhile, management continues to focus on cost controls, particularly information system upgrades that will better integrate distribution and identify expansion opportunities. This has also required no small effort and cost. But now mostly in place, it should enable even faster growth as the company continues to consolidate this still very fragmented industry.

Despite these challenges, Parkland still managed to cover its monthly distribution by a comfortable 1.15-to-1 margin. Despite the acquisitions, there are no significant refinancing needs until 2012, and the company has had no problem raising cash when needed.

The upshot is a combination of robust and reliable growth potential and a high and sustainable yield selling at a modest valuation of 24% of sales.

Parkland’s all-time high above US$17 was established nearly a year after the tax on trusts was announced in October 2007. [Shares] are still well below the highs though they’ve more than doubled off the late-2008 low. One reason is concern about the North American economy and energy prices. The other is uncertainty about what management will do with its dividend when it converts from trust to corporation.

Both worries are overblown, making now an ideal time to pick up Parkland Income Fund below my Buy target of US$13. Subscribe to Canadian Edge here…

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