Applegreen goes for growth

Applegreen's recent annual meeting trading update highlighted the impact on trading of severely cold weather in March and rising international fuel prices, which has squeezed margins, particularly in Ireland. However, for investors focused on the business's long-term growth potential, the group's performance under these conditions was reassuringly resilient. Indeed, despite the short-term challenges, broker Shore Capital stuck by its full-year forecast for cash profits of €47.1m (£41.6m), pre-tax profits of €29.1m and EPS of 26.6¢ when the group reports results for the year ending December 2018. That constitutes cash profit growth of close to a fifth and EPS growth of 8 per cent, reflecting Applegreen's ability to profit from opening new sites and signing new leasing contracts too. In this year alone, 24 new doors have opened, including seven in Ireland, 14 in the UK and three in the US.

The group has also agreed to a 'capital-light' leasing agreement in the US to take control of a 43-site network in Florida from CrossAmerica Partners, which mirrors the terms of an existing contract in New England following the acquisition of 42 service stations from the Brandi Group in South Carolina last October. It also acts as proof of the company’s international expansion strategy, specifically into the US market. What's more, the CrossAmerica deal – not complete until the third quarter – has yet to make any impact on current-year forecasts, but could generate upside once the deal is signed and brokers adjust their models. This should help bring down the share’s punchy rating.

To fund this acquisitive growth strategy, the group has relied on investors. A 509p placing last Autumn raised £41m, which went towards paying for the Brandi deal and the £21m acquisition of seven sites from the Carsley Group in the UK. But the group now looks well-funded, with net debt representing just 6 per cent of net asset value at the time of full-year results in March.

However, Applegreen should not just be seen as a potential acquirer. There are reasons to think it could make a possible takeover target itself. Forecourt retailing remains a highly fragmented market and Applegreen controls attractive assets. It’s also worth taking note of other high-profile acquisitions in the sector, such as private-equity-backed Motor Fuel Group’s £1.2bn takeover of UK petrol station and convenience retail operator MRH, which Shore Capital calculates is equivalent to £2.4m per site. This deal is awaiting a regulatory thumbs-up, but it could create the largest petrol forecourt retailer in the UK with a total of 900 sites – a major player that might consider further M&A activity in the future.