Activist investor Engine Capital told Parkland Corp.’s (CA:PKI, US:PKIUF) board on Wednesday that the investment firm believes shareholders would be better served if the Calgary-based fuel and convenience store retailer sold non-core assets, such as its British Columbia refinery.

New York-based Engine owns approximately 2% of Parkland’s stock. The activist’s letter to the board focuses on the stock’s underperformance relative to its retail peers. 

“Parkland is currently trading at a considerable discount to its retail peers and intrinsic value. The Company has a market capitalization of around $4.9 billion and an enterprise value of approximately $10.4 billion, implying a 2023 free cash flow yield of around 15%, a 2023 price-to-earnings multiple of around 12x and a 2023 EV-to-EBITDA multiple of around 6.5x,” Engine's March 22 letter stated. 

“These multiples are too low on both an absolute and relative basis. By comparison, Alimentation Couche-Tard trades at a 2023 price-to-earnings multiple of around 16x and a 2023 EV-to-EBITDA multiple of around 9.5x.”

To eliminate the discounted valuation, Engine Capital argues that the sale or spin-off of its refinery would enable investors to properly value its convenience stores and fuel retail businesses, which are far less complex.

Barrel Buyers 

Engine Capital says that interested parties are waiting in the wings to buy the 55,000-barrels-per-day refinery and its heating oil and propane distribution business. Parkland acquired the refinery for $1.5 billion from Chevron Canada in 2017. The acquisition included 129 gas stations in the Vancouver area where the refinery is located. The move tripled Parkland’s Chevron stations in the province. 

“I believe we've found an opportunity that is an ideal next step for Parkland on its growth trajectory,” CEO Bob Espey said on a conference call.  “I'm certainly excited for the road ahead for Parkland.”

Espey remains CEO of Parkland. Excluding Wednesday’s gains, Parkland’s stock has traded sideways since the acquisition nearly five years ago. The vertical integration strategy continues to plod along. That could explain the mediocre Fund Sentiment Score of 46.41 that PKI stock garners on Fintel's dashbooard of stocks that are being most bought by funds. The score ranges from 0 to 100, with higher numbers indicating a higher level of accumulation to its peers, and 50 being the average.

“We understand that M&A has historically made sense for the Company in the context of increasing its supply advantage. At this stage of its evolution, however, Parkland has sufficient scale, which is why the Board should now focus on optimizing the Company’s structure, simplifying its business and becoming a best-in-class fuel and convenience retailer,” Engine Capital wrote. 

In addition to the activist’s call to explore strategic alternatives for its non-core assets, it’s also proposed that Parkland add board members with convenience store and capital allocation experience. In addition, it would like some of the old guard replaced -- Chairman Jim Pantelidis has been on the board for 24 years -- with younger, independent directors.

High Comp 

Its third point is to redo executive compensation to align senior management with shareholders more closely. For example, larger companies are the peer group used to set Parkland’s executive compensation. This leads, Engine Capital argues, to artificially high compensation.

That’s a lot to ask from an investor with only 2% of the stock. 

Last August, the company did a share exchange with the Simpson family to buy the final 25% of SOL Limited it didn’t already own. Parkland acquired 75% of the Caribbean fuel marketer in October 2018 for $1.57 billion. The Simpson family received 12.16 million shares as payment. That exchange increased its stake in Parkland to 19.54%.

If Parkland’s largest shareholder agrees, Engine Capital is off to the races. But that’s a big if.