From RBC Outperform $15 Target
Upside 17
May 11, 2023 Superior Plus Corp. Strong outlook for Certarus drives 2023 guidance increase Our view: Following a strong Q1/23, from both Superior Plus' legacy propane business and Certarus (pending acquisition), and a 5% increase to 2023 Adjusted EBITDA guidance, we are reiterating our Outperform rating and price target of $15. We believe the company is well positioned to grow organically through expanding the Certarus MSU fleet and the continued execution of the company's propane roll-up strategy. The additional supply of SPB common shares coming to market after the Certarus acquisition closes may put near-term pressure on the share price, and we see this as a buying opportunity.
Key points: Certarus’ business surpasses expectations again. Certarus achieved record Adjusted EBITDA in Q1/23 of $63 million (+$22 million from the previous record set in Q4/22, +$35 million from Q1/22). Management believes that roughly half of the outperformance is due to the current low natural gas price environment (picks up incremental margins at lower prices) and the rest is mostly from improved pricing (repricing of contracts from COVID-19 lows). Management also highlighted that a contract with National Grid (100 MSUs on site) generated high margins. Management believes that demand for MSUs outstrips supply and the market demand will grow faster than the growth in the North American MSU fleet. Management is confident Certarus' MSU fleet will operate at full capacity in 2023 with lots of room for capacity growth.
Allocating ~$110 million of capital to grow Certarus in 2023. While the company noted it will continue to evaluate M&A targets in the propane space, growth capital in 2023 will be primarily allocated toward expanding the MSU fleet at Certarus. Management expects to invest ~$110 million in 2023, and currently there is a 9-12 month wait or lead time for new MSUs from the company's supplier. Longer term, management expects the company to grow the fleet at an 8-10% CAGR.
Guidance increase largely to reflect Certarus outperformance. Management increased (and narrowed) its 2023 Adjusted EBITDA guidance range by ~5% to $620–660 million (from $585–635 million), which includes the full calendar 2023 contribution from the pending acquisition of Certarus. Management now expects Certarus to generate $175–185 million of EBITDA in 2023, which is up from $140–150 million.
Increasing our 2023 estimate to reflect higher contribution from Certarus. We raised our 2023 and 2024 Adjusted EBITDA estimate to $549 million and $686 million, respectively (from $547 million and $659 million, respectively). The revision largely reflects management's updated 2023 guidance and the expected performance of Certarus in 2023 and 2024. Our forecast assumes the Certarus transaction begins contributing to EBITDA starting in Q3/23 (rather than a full year of contribution).
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