Superior Plus Corp T.SPB

Scotia comments after conference

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Continuity and Consistency

OUR TAKE: Neutral. While we’re constructive on how Certarus will drive future SPB growth, we’re more cautious near-term on how that growth will be navigated, with leverage already at 3.7x, and 40% of debt floating. That said, Certarus is poised to contribute $185M to $195M of pro forma EBITDA in ‘23, with further growth in ‘24 (higher volume + unit margins). SPB’s recent MSU order (Hexagon’s TITAN-450s) will increase its unit count substantially (to 700+ in ‘23), supporting the robust demand we’ve seen for low-carbon energy solutions. As SPB deploys its MSU fleet, EBITDA should normalize to the high-$200ks/MSU. While leverage remains elevated, having deteriorated slightly q/q, the previous mgmt team’s decision to partially fund ($0.9B out of $2.2B) growth through revolvers leaves SPB susceptible to higher interest rates. Higher costs of capital, for both the issuer and the investor, is why PTs are coming down across most equity markets – SPB is not immune. So, while our PT moves to $12.75 from $13.50 to reflect this, we look forward to seeing the new management team unveil a refreshed strategy for ‘24 (without core changes), and with measurable targets and stock catalysts to bring the stock to the next level.

What we learned on the call: (1) Certarus continues to drive earnings growth within SPB’s portfolio, due to its large and growing MSU fleet (to 700+ by the end of ‘23); SPB estimates Certarus should generate $185M to $195M of run-rate EBITDA; (2) SPB intends to reduce its targeted leverage ratio of 3.5x to 4.0x, which follows the previous management team raising it within the past couple of years; (3) capital allocation for ‘24 may include share repurchases, more growth capex spent on purchase of MSUs, and possibly the entry into new markets (Eastern and Western U.S. have been identified so far); (4) as SPB’s customer mix has evolved, mgmt now sees a clear growth opportunity in remote power generation; and (5) SPB is expecting to close on the divestiture of eight retail propane distribution locations in Northern Ontario in Q4.