TD's Take Event
Superior held a virtual investor day, where it introduced its new long-term strategy as
a pure-play propane distribution story, "The Superior Way Forward", which targets
generating $700mm-$750mm of EBITDA from operations in 2026.
Impact: SLIGHTLY POSITIVE
The strategy implies a CAGR of 10-11% (2021-2026), which is slightly better than
what we had anticipated and is above management's previous preliminary estimate
of 8-10% following the specialty chemicals sale. The growth is expected to come
primarily from acquisitions (~75% or ~$250mm), augmented by 2-3% organic growth
(which is 1-2% above industry rates, reflecting market-share wins from digital
initiatives and marketing), reduced operating expense ratios, and the recovery of
commercial customer volumes affected by COVID-19. A clear takeaway for us
is that Superior is focused on building a nimble, digitally-based logistics
business with the customer experience at its core. We anticipate that this will
have the added benefit of driving greater acquisition synergies and solidifying
SPB as the industry acquirer of choice.
Largely self-funded growth: Superior is targeting $1.9bln of acquisitions, which
it believes can be financed with existing liquidity and future FCF generation, while
keeping leverage within target of 3.0x-3.5x. However, this assumes a smooth
cadence of M&A, which management noted is unlikely. As a result, leverage could
temporarily spike depending on the timing and size of acquisitions or additional equity
may be required for larger acquisitions. Superior is modelling acquisitions assuming
a blended post-synergy multiple of 7.5x, which we believe may be conservative,
given its track-record of delivering synergies above plan.
M&A pipeline: Superior highlighted 1,350+ possible targets, with 15+ in active
discussion. The majority of acquisitions are expected to be U.S.-based, given the
larger market size, relative attractiveness of the residential margins, and given SPB's
current market-share concentration in western Canada.
TD Investment Conclusion
We are maintaining our BUY recommendation and $17.00 target price. We
are attracted to Superior's pure-play propane distribution operations, which provide
stable, recurring revenues (albeit weather dependent), and demonstrated ability to
grow through M&A in a highly fragmented market. Moreover, SPB offers an attractive/
sustainable dividend and has support from two anchor investors.