Post by
SusanBolland on Aug 10, 2022 8:18am
TD report on Q2 Target unchanged at $15.50
Seasonally Weak Q2; Guidance Unchanged; CEO Retirement Announced
Although the headline EBITDA miss is somewhat disappointing, we view it as largely immaterial, with Q2 being a seasonally weak period for residential/commercial heating. Recall, Q2 traditionally only represents 5-10% of full-year EBITDA and for context the ~$4.6mm EBITDA miss represents ~1.0% of SPB's full-year EBITDA guidance of $425mm-$465mm. On a YTD basis, SPB has achieved ~62% of its fullyear guidance, broadly in line with historical seasonality.
CEO retirement: SPB provided advanced notice that Luc Desjardins plans to retire effective July 31, 2023, providing sufficient time to find a suitable successor and help manage the transition. Mr. Desjardins has been with SPB for 11 years and spearheaded the company's strategic transition from a conglomerate to a pure-play propane distributor. The Board has commenced the search for a new CEO.
M&A: SPB's leverage ratio is ~3.7x (target range of 3.5x-4.0x), which we believe leaves sufficient capacity to continue its M&A agenda when combined with future FCF. However, given that SPB has already deployed ~$805mm or ~42% of the planned $1.9bn of acquisitions contemplated in its 2026 growth plan, we believe catch-up on integration is now front-and-center. In our view, larger acquisitions are likely on the back burner until 2023. Additionally, we believe patience around further deal execution could prove advantageous for valuations in light of rising interest rates, b roader economic uncertainties, and inflationary pressures, which SPB is better positioned to handle given its scale.
TD Investment Conclusion We are attracted to Superior's pure-play propane distribution operations, which provide recurring (albeit weather-dependent) revenues, and its highly fragmented market opportunity. Moreover, SPB offers an attractive/sustainable dividend and has support from two anchor investors.
Valuation Superior Plus is currently trading at 8.8x our F2023 EBITDA estimate, above its five-year average multiple of 8.5x and at a premium to the imperfect peer group of diversified energy-distribution companies at 7.7x. We believe this reflects SPB’s transition to a pureplay propane distribution platform, focused on growth via acquisitions. In addition, we would highlight that UGI acquired AmeriGas (which was operating under a no-growth MLP structure) for 10.0x EBITDA in 2019.
Justification of Target Price Our $15.50 target price is based on 10.25x F2023E EBITDA (multiple unchanged). We value SPB at a premium to its historical valuation of 8.5x, reflecting its transition to a pureplay growth-focused propane-distribution company after the sale of its specialty chemicals division. Our target price implies an ~8% FCF yield.
Comment by
Jtpatrol1 on Aug 10, 2022 9:21am
Rising wages and fuel cost to transport the propane is hurting margins , but Fuel cost have come down a lot since Q2 and hopefully they will be able to pass on some costs to the end consumer. Superior makes all their money in Q1 and Q4 .... Hope to see more aqusitions soon
Comment by
Baystboy07 on Aug 10, 2022 9:27am
unless I do not understand the press release margins are actually up...majority of loss due to hedging.. Q2 2022 U.S. Propane Distribution average margins of 46.0 cents per litre, a 24% increase from 2021 Q2 2022 Canadian Propane Distribution average margins of 28.6 cents per litre, a 5% increase from 2021