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Stockchase Insights
Superior Plus Corp
SPB-T
RISKY
Jun 26, 2024
Stock price when the opinion was issued
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SPB has been very disappointing. It has a shareholder yield of 16% (11% dividend yield, 4.4% debt paydown, and a 0.5% buyback yield). Analyst estimates have largely been trending lower, but forward earnings growth is expected to be strong, but some of this is reflected in its forward earnings multiple of 17X. It is a cyclical business, and we will be watching the earnings release next week very closely to further assess at that time our full review of the company going forward.
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It is hard to like a stock that has cut it dividend by 75%. Weather (milder winters) is an issue for companies involved in the heating business. Its revenue base is not growing as fast as before. The stock has done nothing for a long time. It's interesting that15% is owned by Brookfield. Propane is a very necessary product.
He's looking for a good entry point. Cut dividend, which was long overdue. Now looking at more share buybacks, a good thing. Valuation is really attractive. Strong fundamentals going forward. Not a dividend play, but a good opportunity for growth. Yield is 3%.
(Analysts’ price target is $9.00)The shareholder base has probably rotated by now away from yield investors. The problem is that it has high debt and a high valuation, yet growth is not that great. Weather is also a factor and competition has increased somewhat. Yes, EPS is expected to show good growth in 2025, but even with a good bounce EPS will be lower than it was in 2013. We think management did the right thing with the dividend, but we still think buyers can wait here.
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Strategy was to get bigger in Canada and US propane distribution, and he liked that. Didn't like the payout ratio of 80-90%. Certarus acquisition wise. Balance sheet couldn't support all its big plans. Dividend cut a positive, and should free up capital.
Widespread team turnover since the acquisition, so it'll take him some time to get familiar with new management. Some reasons to be optimistic.
We think the current valuation looks reasonable to us. SPB’s EV/EBITDA is around 8.0x, at the lower end of historical averages. SPB’s debt level is 3.9x, quite high but on par with industry averages and gradually declining. We don’t think the dividend would be at risk for now (although things could change in the future). According to the Annual Information Circular, Brookfield owns 260,000 Preferred shares, each preferred is exchangeable to 115.4 common shares, Brookfield also owns 6,696,500 common shares. Assuming the exchange, Brookfield would own 13.2% of SPB, there is a possibility for a privatization deal, but the probability is uncertain. The business is tough to consistently create shareholder value given the cyclicality, capital intensity and high leverage level. That being said, despite tough execution, the business would have tremendous runway in terms of staying power. Brookfield likes 'recurring' revenue and that is certainly an attractive here. We think $8.50 would be an attractive entry point, but with its small size and leverage investors should consider it a higher-risk stock overall.
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