Parkland Fuel Corporation

Title: Parkland Fuel Corporation - PKI (T) Cdn$27.00 Price: Cdn$27.00 StockRating: Outperform TargetPrice: Cdn$34.00 Headline: Management Commentary Reinforces Positive March 10, 2017 The NBF Daily Bulletin Energy Parkland Fuel Corporation PKI (T) Stock Rating: Target: Risk Rating: Cdn$27.00 Outperform (Unchanged) Cdn$34.00 (Unchanged) Average (Unchanged) Est. Total Return 30.2% Stock Data: Cash Yield 4.3% Implied Price Return 25.9% 52-week High-Low $31.77 - $20.50 Bloomberg/Reuters: PKI CN / PKI.TO Forecasts: FZE Dec. 31 2016a 2017e 2018e Revenue (mln) $6,266.0 $8,814.1 $10,441.8 EBITDA (mln) $253.5 $335.8 $412.2 DCPS $1.45 $1.65 $2.09 Dividend $1.12 $1.15 $1.15 Payout Ratio 77% 70% 55% DC Yield 5.4% 6.1% 7.7% EV/EBITDA 13.4x 12.0x 10.1x P/DCPS 18.6x 16.4x 12.9x Financial Data (proforma CST): Shares Outstanding (mln) 105.3 Market Capitalization (mln) $2,841.8 Net Debt (mln) $1,432.0 Enterprise Value (mln) $4,273.8 Net Debt to Capitalization 34% Net Debt to 2018e EBITDA 3.5x Industry Rating: Market Weight (NBF Economics & Strategy Group) Company Update Management Commentary Reinforces Positive Bias, Both Short-Term and Long HIGHLIGHTS Marketing message compliments Outperform rating We hosted CEO Bob Espey and CFO Mike McMillan for investor meetings, the takeaways supporting our favorable investment bias. These include: Internal + financial capacity to absorb another large acq n CST set to close by the end of Q2, but PKI positioned for more. Extremely bullish on the CST opportunity A number of reasons to suggest synergies are understated. C-store opportunity significant On The Run, loyalty programs & private label all opportunities. Propane a likely source of ongoing accretive M&A Highly fragmented, accretive and lower risk growth proposition. Positioned for growth within PKI USA Mini Parkland may have reached an inflection point. Valuation relatively attractive given momentum We introduce 2018e forecasts, which assume +20% y/y growth in top-line, +22% in EBITDA and +25% to DCPS, reflecting a 55% payout ratio, supported by: 1) a full Q contribution from CST (vs. just Q3/Q4 in 2017); 2) ~$10 mln in CST synergies, conservative given mgmt is guiding to $20-$22 mln and this amount does not include any potential supply synergies (TBD given Valero contract in place) & mgmt s track record (Pioneer tracking >50% ahead of guidance); 3) low-single digit organic growth given the favorable trajectory and backdrop for the legacy retail and supply/wholesale verticals, and evidence PKI s commercial and US operations have hit an inflection point; 4) ongoing organic capex initiatives (C-Store investments, transloading, terminaling); and 5) we have not incorporated any additional acquisitions into our estimates, although PKI is well-positioned to remain active given internal bandwidth, a high capacity to finance and a deep pipeline of various opportunities (retail & propane focus). Our unchanged $34 target price implies ~11.5x 2018e EV/EBITDA, and with a >30% implied total return we reiterate an Outperform rating. Company Profile: Parkland Fuel Corporation is the largest independent marketer and distributor of fuel in Canada, with a growing footprint in the United States. Trevor Johnson, CFA, MBA - (416) 869-8511 trevor.johnson@nbc.ca Stock Performance (Reuters) Daily [.GSPTSE List 149 of 249] PKI.TO Line, PKI.TO, 2017-03-09, 26.68-0.22 2016-03-08-2017-03-28 (TOR) Price CAD 28 26 Associates: Kyle Stanley - (416) 507-8108 kyle.stanley@nbc.ca Alex Bauer - (416) 869-7535 alex.bauer@nbc.ca Vol, PKI.TO, 2017-03-09, 89,921.00 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Q1 16 Q2 2016 Q3 2016 Q4 2016 Q1 2017 24 22 Auto Volume 1M Auto

Marketing Summary We hosted CEO Bob Espey and CFO Mike McMillan for investor meetings, the takeaways supporting our favorable investment bias. These include: Internal and financial bandwidth to support another large transaction Arguably the most important takeaway from marketing was that management confirmed our belief that PKI had the internal and financial capabilities to handle another larger scale transaction despite the anticipated closing of CST the company s largest transaction to date scheduled by the end of Q2. A primary reason for PKI s capital markets success is that it offers one of the more attractive hybrid growth/yield models within the TSX diversified income universe. Investors are drawn to the story for its above average trajectory of volumes, top-line, EBITDA and cash flow per share, and with the company s primary objective to expand its network, its pipeline deep and its capacity to finance high we remain bullish on M&A opportunities. Despite the recent aggressive growth in its primary Canadian gas station market (proforma CST ~1.6k locations, representing 1/6th of the country) management sees continued growth in this space. Quebec is a logical area of consolidation given PKI s initial foray with CST, and since Couche-Tard s critical mass handcuffs it for competitive reasons. Also PKI s Western Canada footprint is largely rural, with higher density urban markets like Calgary, Edmonton and Vancouver on the radar. The same can be said for the GTA, where PKI has no exposure but a sizable Ontario presence with Pioneer. The company s commercial segments (particularly propane) and PKI USA are also well-positioned to benefit from M&A, the specifics outlined below. Proforma CST PKI has just ~$50 mln of available credit and an already leveraged 3.6x net debt to proforma EBITDA (the high-end of the targeted 2.0x-3.5x range), but we remain constructive on its capacity to finance, as: 1) a new credit facility is being negotiated alongside the closing of CST that will provide additional dry powder based on the step-up in size; 2) we forecast PKI is able to naturally de-leverage to sub-3x by the end of 2018 given its attractive free cash flow profile; 3) PKI is arguably the most followed name by the buy side amongst our coverage list, and we see no issues with the company tapping equity markets to help finance targeted transactions; and 4) PKI has $200 mln of senior secured notes due 2021 callable this May and another $200 mln due 2022 callable in November, the current environment conducive to PKI favorably refinancing and freeing up additional cash flow on interest savings. Extremely bullish on the CST opportunity Management reaffirmed that the transaction is set to close by the end of Q1/17. Couche-Tard/CST are awaiting approval by the Federal Trade Commission and Couche-Tard/PKI/CST from the Canadian Competition Bureau, but discussions are progressing and management is optimistic. CST represents PKI s largest transaction at ~$965 mln, providing the company with a natural extension of its predominately Western Canadian and Ontario footprint into Quebec-east. We forecast initial DCPS accretion of 30%+, with a significant opportunity from synergies over time. Management is guiding to ~$20-$22 mln of synergies from CST, but we believe there is upside to this amount over time, given: 1) it does not include supply synergies as CST is tied to a long-term contract with Valero, but PKI is the second largest purchaser from Valero so there is likely the opportunity for some cumulative savings; 2) management has a track record of under-promising and over-delivering on synergies, most recently with Pioneer that was suggested to achieve ~$10 mln annually within three years but has already achieved >$15 mln in 18 months; and 3) CST s non-retail assets (commercial fuel, cardlock, back office) all have potential to be leveraged into PKI s existing operations. CST recently reported its Q4 results. For its Canadian portfolio (relevant to PKI) fuel gross profit increased 4% and merchandise and services gross profit increased 5% vs. Q4/15, led by improved volumes and higher merchandise/services sales. Same-store merchandise and services sales per site per day increased 2% y/y. Management indicated the update was surprise-free and consistent with internal expectations for the business.

C-store opportunity significant PKI is realizing meaningful upside from focusing on its convenience store franchise, which posted +3.8% y/y SSSG in 2016 largely due to: 1) leveraging the Pioneer network of locations; 2) store refurbishments and system investments; and 3) ongoing promotional, pricing and other retail strategies. Proforma CST PKI is expected to have ~450 corporate owned stores, alongside running the C-Store offering for another ~150. This ~600 location critical mass provides an opportunity, as: 1) it represents the second largest network in Canada, providing meaningful buying power; 2) it provides a captive audience to roll-out the recently acquired On The Run banner from Imperial Oil; and 3) it will provide clear data to help facilitate the potential roll-out of On The Run to the ~1.1k dealer locations PKI currently provides fuel for. PKI is investing in opportunities complementary to its C-Store franchise, including: 1) taking advantage of rewards programs: the company s existing Fas Gas and Pioneer loyalty plans have a combined 1.4 mln members, making it one of the top ten in terms of size in Canada. CST has no rewards program, and management believes there is an opportunity to take advantage of its scale to implement a comprehensive rewards plan across its network, which has been shown to drive volumes; and 2) leveraging a private label offering: currently the only private label SKU is water, but salty snacks, sodas and other goods are all near-term possibilities. Propane a likely source of ongoing accretive M&A In Q4 PKI s commercial business surprised on the upside, in large part from the segment delivering >50% more propane y/y. Management is bullish on the propane opportunity going forward, and views this commodity as a focal point for future growth. The industry in Canada is highly fragmented, with 150-200 opportunities based on PKI s analysis. Six tuck-ins were completed in 2016 and the prospects are encouraging for this theme continuing in 2017+. PKI is able to acquire providers for typically 4x-7x EV/EBITDA valuations, and then immediately realize a 30%+ lift in profitability from integrating them onto their own supply contracts and doing the same for transportation/distribution. The resulting accretion is significant and relatively low risk given the nature of the business. Opportunities may emerge from the proposed acquisition of Gibson Energy s propane assets by Superior Plus (see analyst Pat Kenny s commentary here). With this transaction set to take the Western Canadian market from essentially three players to two PKI is in a position to establish additional share, as previous GEI + SPB customers look to de-risk supply by introducing another provider. Positioned for growth within PKI USA PKI USA is essentially a mini Parkland, a combination of retail, commercial and supply/wholesale offerings. The geographic footprint includes N/S Dakota, Montana, Minnesota and most recently Wyoming, these markets having a number of similarities with PKI s Canadian operation, including: 1) sparse population density; 2) relatively lower competition; 3) proportionately high distribution needs; and 4) generally inefficient. This backdrop is conducive to PKI continuing to grow in the Northern US. Acquisition multiples are typically in the 4x-5x range, and management has shown a commitment to US expansion, taking its retail gas station count from 12 to 26 in recent years. As indicated above PKI has meaningful growth opportunities across its domestic portfolio, but it is still encouraging to see the company have the option to complementary and accretively expand its US presence.

Investment Summary We introduce 2018e forecasts, which assume +20% y/y growth in top-line, +22% in EBITDA and +25% to DCPS, reflecting a 55% payout ratio, supported by: 1) a full Q contribution from CST (vs. just Q3/Q4 in 2017); 2) ~$10 mln in CST synergies, conservative given mgmt is guiding to $20-$22 mln and this amount does not include any potential supply synergies (TBD given Valero contract in place) and mgmt s track record (Pioneer tracking >50% ahead of guidance); 3) low-single digit organic growth given the favorable trajectory and backdrop for the legacy retail and supply/wholesale verticals, and evidence PKI s commercial and US operations have hit an inflection point; 4) ongoing organic capex initiatives (C-Store investments, transloading, terminaling); and 5) we have not incorporated any additional acquisitions into our estimates, although PKI is well-positioned to remain active given internal bandwidth, a high capacity to finance and a deep pipeline of various opportunities (retail & propane focus). Our unchanged $34 target price implies ~11.5x 2018e EV/EBITDA, and with a >30% implied total return we reiterate an Outperform rating.

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