Upgrade ATB Capital Markets analyst Nate Heywood thinks Superior Plus Corp.’s (SPB-T) $1.05-billion acquisition of Certarus Ltd. is “transformative,” seeing it “meaningfully” expand its U.S. fuel distribution platform as well as its low carbon fuel exposure.
Shares of Calgary-based Superior Plus rose 3.9 per cent following the premarket announcement of the deal for Certarus, which operates mobile storage units for green fuels on both sides of the border.
“The Certarus asset base offers both a complementary and expansionary platform for SPB,” said Mr. Heywood in a research note titled ‘Tis the Season for a Hallmark Transaction. “Both businesses can offer portable energy needs to large customers and now have a heavily diversified fuel product base to enhance customer optionality. Additionally, the legacy business already has hydrogen capabilities and should benefit from its now expanded distribution network. In addition, we expect the acquisition to further broaden SPB’s customer base and add favourable geographic diversification in the U.S. market. The business model is also similar to SPB’s current operations as commodity costs are passed onto consumers, leaving limited pricing exposure.”
The analyst emphasized the deal “accelerates” the targets laid out in the company’s “Superior Way Forward” growth strategy, which includes a 2026 EBITDA run-rate of $700-$750-million driven by $1.9-billion in accretive acquisitions, which has already been achieved. He now expects “balance sheet maintenance and asset integration/optimization initiatives to take the reigns near-term.”
“Our estimates support a near-term (2023 and 2024) run-rate EBITDA range near $140-$150-million.,” he said. “Despite the dilutive $500-million equity issuance related to funding the transaction, we have modeled a double digit (15-per-cent) increase in our 2023 adjusted operating cash flows per share estimate, in line with management’s guidance. Turning to leverage, a portion of the transaction is expected to be funded through cash ($353-million) and the assumption of $196-million in debt; however, the transaction is expected to compress SPB’s leverage position on a pro forma basis to a guided pro forma leverage position of 3.8 times in 2023, in line with ATB estimated net debt to EBITDA multiple of 3.8 times (target: 3.5-4.0 times).”
After “materially” increasing his estimates to “capture cash flows for the Certarus operations,” he raised his target for Superior Plus shares to $12.50 from $12, maintaining a “sector perform” rating. The average target on the Street is $12.68.
“We continue to view the dividend yield of 7.1 per cent as an attractive consideration given the modest 2023 payout ratio of 39 per cent and management’s telegraphed commitment to the current distribution,” said Mr. Heywood.
Elsewhere, seeing Certarus providing a “high growth, complimentary platform,” Raymond James analyst Steve Hansen upgraded Superior Plus to “outperform” from “market perform” with a $13.50, up from $13.
" We view the Certarus transaction as an attractive bolt-on platform that offers several key benefits, including: 1) a leadership position in complimentary, high-growth end-markets; 2) a proven management team with a solid track record; 3) double-digit accretion to SPB’s distributable cash flow/share; and 4) a healthy improvement in the company’s pro-forma leverage,” said Mr. Hansen. “Given recent progress, SPB now expects to reach the lower end of its $700-$750 mln EBITDA from ops target by 2024 (vs. 2026 prior).”
National Bank’s Patrick Kenny raised his target to $13 from $12 with an “outperform” rating.