Superior Plus Corp T.SPB

Scotia comments after conference

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Turning the Corner

OUR TAKE: Positive. We exit Q1 reporting with five takeaways. First, Certarus continues to shine (>20% ROIC), with volume growth + margin expansion supporting results. Capacity growth continues, and now Certarus may participate in new verticals, including data centres etc. We’re looking for 15% to 20% EBITDA growth y/y. Second, the move by SPB to transition certain propane customer segments toward fee-based charges, is an important tool to combat same-customer volume declines due to climate change and/or more energy-efficient applications. This will improve earnings volatility, over time. Third, leverage has likely peaked at 3.8x, with no TTM deterioration q/q and SPB forecast for a ~0.2x improvement by the end of the year. Headcount reductions of ~100 and ~200 in Canada and the U.S., have helped SPB stabilize the B/S. Fourth, it’s clear that SPB has transitioned to lower risk organic growth vs. historically empire-building (previous management team) through acquisition, whether on the traditional propane distribution business or via Certarus. Fifth, and tied to SPB’s move, we have transitioned our model to a US$ functional currency. We maintain a Sector Perform rating, although in light of the above we’re biased higher.

Note on US$ functional currency: Consistent with SPB’s transition to a US$ reporting currency, we have updated our model. The old estimates displayed within this note are our prior C$ estimates; new estimates are our revised US$ estimates.

What we learned on the call: (1) as previously discussed, SPB is migrating from a focus on M&A to a focus on operations; (2) management will monitor customer acquisition and churn as SPB looks to improve margins. For customers on the lower end of the volume scale, SPB will lean on fee-based charges in addition to volume-based charges; (3) management expects to see Certarus use 785 MSUs, which will be weighted towards 2H/24; (4) recent operational expansions have included South Dakota (RNG collection and injection). Near-term focus will be on increasing capacity at existing locations; (5) on the cost side, SPB has reduced headcount in Canada (by ~100 people), in the US (by ~200), and optimized routes; (6) management sees opportunities for Certarus to participate in new verticals, including data centers, though Certarus will look to bridge gaps in energy infrastructure; (7) management estimates a $10M to $15M EBITDA impact, had Q1 weather been consistent with 5-year averages; and (8) management views greenfield organic growth as the best path forward, having not yet seen an acquisition target that would rival Certarus in terms of returns.