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Applegreen could be an easy way to make a quick buck
Shares in roadside convenience retailer Applegreen (APGN:AIM) are starting to pick up as fuel volumes and food and drink
sales recover from the pandemic-induced downturn. Ride the momentum as a short-term trade.
Measures to come out of lockdown are driving a gradual increase in road usage and if consumers are unable to travel overseas for summer holidays, Applegreen might also benefit from a staycation boom.
Operating in Ireland, the UK and North America, fuel seller Applegreen has been deemed an essential service provider.
It also operates motorway service areas in the UK and Irish Republic which are strategic infrastructure assets with high barriers to entry due to long development lead times and government legislation.
Applegreen is the majority owner of the UK motorway service operator Welcome Break. It acquired this majority interest in a transformational 2018 deal that reduced its dependence on fuel sales.
Throughout the UK lockdown, Welcome Break kept all 39 of its motor fuel forecourts and accompanying retail units open, because the nation’s key workers needed to refuel and rest throughout the worst stages of the pandemic.
From 4 June, Welcome Break plans to be operating 72 food and drink units at 26 of its motorway service stations. And while necessary store adjustments for social distancing and enhanced hygiene measures will mean lower sales densities and higher costs, the unlocking measures across Applegreen’s markets offer a catalyst for earnings recovery.
This should be treated as a high-risk investment because it has a large net debt position – €545m as at 20 March – although it is worth pointing out it has land and buildings worth €414m as at the end of 2019.
Applegreen acted quickly to protect itself from the pandemic hit by reducing costs, conserving cash flows and accessing additional facilities.
Management insist the business has enough cash resources to trade through a downside scenario where the recovery period is more prolonged into 2021.
Despite this reassurance, one cannot rule out the company raising a slug of new cash on the market. That might dilute existing investors, but it would make sense to strengthen the balance sheet.
Shore Capital sees Applegreen as ‘a survivor of this pandemic, one like a number of firms that is embracing new learning that we believe will lead to a leaner and fitter group in time’.
Target a 15% return on this stock and lock in profit once the price hits 368p.