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Buy in to Applegreen's expansion plan

The petrol forecourt retailer has plans to grow on both sides of the Atlantic
August 24, 2017

Following news of a third acquisition this year, we think there are bright prospects for investors in dual-listed Irish forecourt and food-to-go operator Applegreen (APGN). In its most recent deal, announced earlier this month, the group has agreed to pay £21m for the Carsley business, which is made up of seven sites (one petrol forecourt and six trunk road service areas) largely along or near the section of the A1 in the Midlands. The deal will be funded from the company’s existing cash and debt facilities and fits with Applegreen's ambition of increasing its presence in England.

IC TIP: Buy at 485p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points

International diversification

Acquisition-led growth strategy

Good underlying growth

Strong balance sheet

Bear points

Exposure to oil price

Consumer confidence

What is clearly becoming an acquisition-led growth policy looks like good news for future earnings, dividends and returns, given the group's operational nous. What's more, come the group's half-year results, which are due out on 12 September, we fully expect analysts to incorporate the Carsley deal and others from this year into their financial forecasts, which should trigger earnings upgrades for 2018 and beyond.

That said, given that the Carsley sites' commercial ties to BP have a few years to run, and taking account of planning considerations, it will be 2020 before Applegreen is likely to be able to show off the full potential of the acquisition. In the meantime, the group should benefit from its ever-growing food-to-go proposition – now a well-established trend in the food retail, travel and leisure sectors – along with the intensity of traffic densities in the key areas it is targeting for growth. Indeed, according to house broker Shore Capital, the traffic densities around the Carsley sites are “several times” those witnessed by the group’s domestic outlets in Ireland.

News of the Carsley deal came hot on the heels of another move to expand into markets outside the Republic of Ireland, this time the US, where its fledgling stateside operation last year generated 2 per cent of group sales and gross profits. This business is now due to get a substantial boost from the acquisition of assets from the Brandi Group in South Carolina, which was announced by Applegreen in July. This will add a further 42 sites (34 standalone petrol filling stations and eight standalone Burger Kings) to the group’s international portfolio. However, unlike the UK and Ireland, where sites are typically owned via a mix of freehold and leasehold structures, Applegreen is focused on conducting its transatlantic expansion in a “capital light” manner. In the case of the Brandi deal, this means partnering with a US real estate investor that will buy the property, and entering a long-term agreement to lease and operate sites once the deal completes in the fourth quarter of this year. It also means Applegreen only has to stump up $5.4m (£4.2m), including working capital, of the $76m total.

Working further backwards, Applegreen’s first deal of the year – now completed – was to buy a 50 per cent stake in the Joint Fuel Terminal in Dublin. This deal provides Applegreen with the facility to import fuel directly from refineries, thereby securing what the company has called “a strategically valuable platform” that provides a “competitive supply for the majority of its Irish fuel requirements”. The acquisition is expected to immediately boost earnings.

Importantly, in its domestic markets (58 per cent of 2016 sales and 71 per cent of gross profit) and Northern Ireland, the group also operates motorway service areas (MSAs), which are located on major motorways with large facilities, extensive parking and at least three food offers. Here the group operates its own-brand food and beverage offers – Bakewell and aCafé – and a range of other food brands including Subway, Costa Coffee, Greggs and Lavazza. According to Shore Capital analysts who have visited the group’s “truly outstanding” Lisburn site, “peoples’ minds will be blown” once the group agrees to run its first MSA in England.

A quick final word – acquisitions shouldn’t overshadow the organic growth reported by Applegreen in Ireland, the UK and the SA. In the last set of annual results, like-for-like food and store sales grew by 7.1 per cent on a constant-currency basis, with related gross profit up by 8.9 per cent.

APPLEGREEN (APGN)    
ORD PRICE:485pMARKET VALUE:£392m
TOUCH:480-490p12-MONTH HIGH:488pLOW: 360p
FORWARD DIVIDEND YIELD:1.5%FORWARD PE RATIO:20
NET ASSET VALUE:143¢NET DEBT:17%
Year to 31 DecTurnover (€m)Pre-tax profit (€m)Earnings per share (¢)Dividend per share (¢)
201415814.215.70.0
201520117.721.40.0
201623721.022.41.3
2017*26522.122.96.7
2018*29226.227.17.8
% change+10+19+18+16
Normal market size:750   
Market Makers:4   
Beta:0.10   
*Based on Shore Capital forecasts 
£1=€1.10