Applegreen – Irish to the Core & Reshaping the Service Station Industry
David Fahy, CFA
David Fahy, CFA

Applegreen prides itself on being an Irish company and a true Irish success story. The company opened its first service station in Dublin in 1992, and has expanded and grown to an operation that now includes more than 483 forecourt sites and employs c. 10,700 people across Ireland, the UK and the US with its headquarters in Dublin. It is the number one motorway service area operator in Ireland and the number two operator in the UK.

One of its key objectives is to offer a superior customer experience, in essence to reshape the role of the service station. Stopping off at an Applegreen station, consumers can avail of fuel, coffee, ready made meals and other merchandise via its own retail brands. This is further enhanced by brand partnerships with fast food outlets such as Subway, Costa Coffee and Burger King to which Applegreen leases floor space.

Cheapest Valuation Since Listing
Applegreen shares have traded back to €5.26 in recent days, down from a previous high of €6.50. Their shares IPO’d in 2015 at £2.77 (€3.95) and management raised more equity in an oversubscribed placing at £5.43 in October 2018. At current levels, Applegreen offers the most attractive valuation for investors to buy shares in the listed company since listing – trading with an earnings yield of 7.1% (14x market cap/net income). Having previously broken out above €5 due to a surge in buyer interest, we expect €5 to be a level of resistance to the downside – hence between €5 and €5.30 looks to be a good entry point.

We believe that shares have fallen temporarily and will regain momentum over the coming months as clean earnings growth returns to high double digits.

Long Term Investment Case Is Extremely Solid
Applegreen has mastered the art of fuel station service in Ireland and the UK, by making the roadside stop more of a customer experience that is about quality, convenience and choice. Food related revenue generates c.60% of group profits and is the most profitable revenue stream with fuel often a product to entice the consumer into the retail space.

Having dominated and consolidated the Irish market, Applegreen continues to invest in cloning the business model across the UK and US. With 125,000 service stations in the US, we believe the long term opportunity in this market is significant for Applegreen.

To summarise FY 2018 results, Applegreen reported €1.9bn of revenue (+32% year-on-year) and €241m of gross profit (+33% year-on-year). Earnings before interest, tax, depreciation and amortisation charges (EBITDA) came to €47.8m, reflecting growth of 20% year-on-year and earnings per share was 25.4c, reflecting growth of 2% year-on-year. The earnings per share figure was impacted by the share placement to fund the Welcome Break acquisition in 2018. When the Welcome Break acquisition is included, Applegreen delivered €58m of EBITDA and €282m in gross profit for FY 2018. Applegreen acquired 50.01% of Welcome Break in October 2018 and we expect H1 2019 results due in September to be very strong as this newly acquired business is fully integrated. We expect Applegreen’s revenue to increase by about 50% over the next two years and earnings to grow in tandem.

Expansion Across the UK and US
We see compelling value in the company’s acquisition of a majority stake in Welcome Break. As one of the UK’s leading independent motorway service operators, it has 27 sites across the UK. Applegreen will enlarge its footprint in the UK and is also set to transfer a number of forecourt sites in the UK to sit under the management of Welcome Break. Applegreen raised €175m in equity in what was an over-subscribed placing to fund the acquisition. The acquisition was done at less than 10x FY20 EV/EBITDA and is expected to boost earnings by 15% in FY 2020. The company is also expanding its footprint in the USA, with the acquisition of Brandi Group service stations, where it benefits from 90 leasehold assets, and has leased a network of filling stations through CrossAmerica Partners, both of which are said to be key drivers for growth in the medium term.

Upcoming Catalysts
June’s solid trading update will be followed by H1 2019 results in September which we think could drive a re-rating. We expect further catalysts in the short term including the possible sale of hotel assets in the UK, and further acquisitions of leasehold assets in the US given that this market offers the strongest growth prospects.

Longer term, we have confidence in management delivering value for shareholders. This is highlighted by a number of strategic moves such as the purchase of a 50% stake in Dublin Port fuel terminal in 2016 and the evolution of its food offering with more in-house products including the launch of its own vegan sausage roll! The company continues to focus on cloning the successful Irish business model across the UK and US through relatively cheap acquisitions in the UK and leasehold of assets in the US.

The increased leverage and leasing of assets should drive shareholder return on equity over the next twelve months, which should lead to a re-rating in valuation over the medium term.

To speak with a Portfolio Manager or Account Executive, please phone the Cantor Fitzgerald dealing desk on 01 633 3633.

Warning: Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up.