Superior Plus Corp T.SPB

Dividend cut coming ?( From Scotiabank)

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Should Superior Cut Its Divvy?

OUR TAKE: Negative. Our PT falls to C$9/sh, largely on a weaker Certarus outlook. First, Certarus has hit a speed bump in its main vertical, as a ramp in West Texas competition has compressed margins. It’s unlikely this will dissipate fully, so previous EBITDA CAGR assumptions have now been challenged. Second, the propane business continues to face climate change headwinds, although a transition toward fee-based charges helps. Third, while deleveraging the balance sheet is moving in the right direction, it’s been quite slow, limiting near-term financial flexibility. Fourth, and with a ~9.5% yield, it’s clear to us the market is no longer paying SPB for its dividend. So, should SPB cut its divvy? By cutting the dividend to C$0.12/sh from C$0.72, and with ~250M shares outstanding, this would free $110M annually (on base EBITDA of ~$500M) for accelerated deleveraging and/or buybacks. In our view, the C$0.12 would allow SPB to remain eligible for institutional divvy funds. The pushback: an uproar from a heavy retail crowd that supports the name. While this would lead to an uncomfortable churn of its shareholder base, it would likely be mild, especially considering the stock is already at a 12-year low (ex COVID shock). Sector Perform.

What we learned on the call: (1) SPB’s unchanged ’24 guide is driven by an ability to run the business more effectively: managing customer retention, pricing, and customer acquisition; (2) management sees opportunities to improve the cash flow profile of the business, with the priority still a lower leverage target by the end of ’26 and supporting the dividend; (3) Certarus’ competitors in West Texas are largely small and focused businesses, which coupled with lower summer activity in the region means pressured pricing; (4) business development opportunities for Certarus include RNG (doubled over last year), new greenfield hubs, as well as power gen and backup; (5) in Canada, SPB is looking for opportunities to capitalize on existing assets; and (6) management doesn't see a need to adjust SPB’s capital structure in order to continue supporting a divvy.