TD commentsEvent On February 18, SPB reported Q4/21 adjusted EBITDA of $142.2mm, 5% above TD's $135.2mm estimate (consensus: $142.1mm) and provided 2022 EBITDA guidance of $410mm-$450mm (8% below our previous estimate and 10% below consensus, at the midpoint).
Impact: NEGATIVE
Q4/21 results were better than feared, given the impacts of unseasonably warm weather. However, this was overshadowed by weak 2022 guidance and management's decision to increase its leverage target to 3.5x-4.0x from 3.0x-3.5x previously, as it pursues an accelerated near-term M&A cadence ($200mm-$300mm planned for 2022). The 2022 EBITDA guidance shortfall appears to reflect a protracted recovery of Canadian commercial volumes alongside Omicron (~$10mm-$15mm EBITDA impact), operating-cost inflation, and delayed timing of synergy realization.
However, management underscored that the majority of the weakness was timing-related and that it expects a recovery from COVID-19 to start later this year, not to mention a clear path to 2023 growth with the close of Kamps acquisition in Q2/22 and incremental synergies after the hyper-acquisitive 2020/2021 (~18-24 months to fully realize synergies)
. Additionally, management reiterated that nothing has changed with respect to the assumptions required to achieve its 2026 target of $700mm- $750mm of operating EBITDA, with the exception that several larger acquisition targets came into the pipeline earlier than expected, and 2021 cash flow was affected by unseasonably warm weather.
In our view, the higher leverage does not create undue risk and we believe that the dividend is safe (~68% payout ratio in 2022, declining to ~57% in 2023 based on our FCF estimates). However, we estimate that pro forma leverage could increase above target to 4.1x-4.3x in 2022 should management deploy its targeted $200mm- $300mm, which could place an overhang on the shares as investors conjecture about an equity raise. Alternatively, if SPB were to temporarily slow acquisitions, we would anticipate a relatively rapid deleveraging.
TD Investment Conclusion We are attracted to Superior's pure-play propane distribution operations, which provide recurring (albeit weather-dependent) revenues, and its highly fragmented market opportunity. Moreover, SPB offers an attractive/sustainable dividend and has support from two anchor investors.