Superior Plus is facing several headwinds, the weather being one of them.
As the largest retail distributor of propane in Canada and fourth-largest in the United States, Toronto-based Superior thrives during frigid temperatures, when its customers, who live in areas not served by natural-gas lines, burn more propane to heat their homes.
But the past couple of winters have been warmer than usual, putting a dent in Superior’s propane sales and earnings. For the six months ended June 30, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) from retail and wholesale propane operations slumped 10 per cent to US$212.7-million.
But mild weather isn’t the only problem Superior is facing. A second reason for the stock’s weakness is that Certarus Ltd., which Superior acquired in 2023 for $1.05-billion, has not been performing up to expectations.
Calgary-based Certarus supplies compressed natural gas, renewable natural gas and hydrogen to industries such as oil and gas production, agriculture and mining. It distributes these products via mobile storage units (MSUs) delivered by road.
But the number of MSUs in service has not grown as quickly as expected. Moreover, Certarus’s margins have taken a hit, with EBITDA per MSU falling to US$36,000 in the second quarter, down from US$46,000 per MSU a year earlier, said Nelson Ng, an analyst with RBC Dominion Securities, in a note after Superior’s second-quarter results in August.
The drop in Certarus’s margins reflects increased competition and lower pricing, particularly in oil-and-gas-producing regions of West Texas, “which could be a long-term issue as the company adjusts its pricing strategies to retain market share,” said Robert Catellier, an analyst with CIBC World Markets, in a note in which he downgraded Superior’s shares to “neutral” from “outperformer.”
With Superior scheduled to report third-quarter earnings after markets close on Nov. 6, investors will be watching Certarus’s results closely. Adding to the drama, Curtis Philippon, who had been president of Certarus since 2016, stepped down in July. He was replaced by Natasha Cherednichenko, who had been chief operating officer since 2020.
Analysts aren’t expecting a quick turnaround.
“We forecast EBITDA at Certarus to be largely flat compared to last year as we have factored in lower year-over-year MSU margins,” RBC analysts, including Mr. Ng, said in a preview of Superior’s third-quarter results.
All of this has raised questions about the sustainability of Superior’s dividend. The company currently pays 18 cents a quarter, or 72 cents annually. With the stock price skidding about 32 per cent year-to-date, the yield has jumped to 10.9 per cent, based on the closing share price of $6.59 on Friday.
When a yield soars into the double digits, it’s a sign the market is nervous about a potential dividend cut. Analysts estimate that Superior’s payout ratio will be between 50 and 60 per cent of adjusted cash flow for 2024, which on the surface doesn’t raise any red flags. However, the company also needs capital to expand Certarus, while aiming to reduce its balance sheet leverage over the next few years as well.
“While [Superior] generates sufficient [free cash flow] to cover its ongoing dividends and maintenance capex (mainly propane), it needs to weigh investments in MSU growth capex against its payout ratio,” said Gary Ho, an analyst with Desjardins Securities, in a recent note.
During its second-quarter conference call, management did not indicate that a dividend cut is on the table. But with the stock losing even more ground since then, some analysts aren’t convinced that maintaining the dividend at current levels is the best use of capital.
When Superior releases third-quarter results, “clarification around [its] dividend/capital return program would be welcomed. In our view, SPB could look to reduce its dividend in favour of aggressive share buybacks,” said John Gibson, an analyst with BMO Capital Markets, in a note.
The silver lining is that, doubts about the dividend notwithstanding, many analysts say the stock is undervalued. That’s because much of the bad news may already be baked into the share price. Of the 11 analysts who follow the company, seven rate it a buy, with four holds and no sells, according to Refinitiv. The average price target is $9.77, representing an implied gain of nearly 50 per cent from current levels. There are no guarantees the stock will reach that target, but it is fair to say that some analysts believe the selling has been overdone.
As always, do your own due diligence before investing in any security and make sure to maintain a diversified portfolio to control your risk.