One Mid-Cap Utility Stock to Punt on- SPB

Superior Plus Corp. (TSX: SPB) is a Canada-based corporation which operates in the Energy Distribution and Specialty Chemicals business. The Company's Energy Distribution operating segment provides distribution, wholesale procurement, and related services concerning propane, heating oil and other refined fuels.

Key highlights

• Stable FY22 Guidance: The business anticipates that wholesale propane prices will be similar to FY21 in FY22, indicating consistent revenue and cash flow. Furthermore, the North American propane market remains extremely appealing due to favorable customer features such as long-term supplier commitment (>10 years), which results in long-term free cash flow creation. As a result of all of these variables, the firm estimates Adjusted EBITDA to be in the range of CAD 410-450 million in FY 2022.
  

• Sequentially improving margins: The company’s higher sales volume in the reported period of Q4 2021, helped it to post superior margins, compared to the previous sequential quarters’ margins. From negative margin profile in Q3 2021, the company posted positive margins, which is a key positive.

Source: REFINITIV, Analysis by Kalkine Group

• Acquires Kamps Propane and Kiva Energy: The business recently finalized the acquisition of Kamps Propane and Kiva Energy for about CAD 302 million. On the west coast of the United States, this acquisition provides a significant retail propane distribution platform. Furthermore, Kamps Propane and Kiva Energy are expected to earn roughly CAD 42 million in Adjusted EBITDA on a run-rate basis in the following 24 months, according to the business.

• An Income Play: The Company has an excellent track record of dividend distribution and has increased its distribution over the years, reflecting resilience and healthy cash flow generation. Recently, the company announced a quarterly cash dividend of CAD 0.06 per share with a payment date of April 18, 2022. Moreover, at the last closing price of CAD 11.67 as on March 25, 2022, the stock offered a healthy dividend yield of 6.17%, which looks decent considering the current macros and interest rates.

Risks associated with investment: The company’s reported a havoc increase in input costs in the recent past, which has hindered overall performance. Hence, a continuation of the above trend would dampen the company’s profitability in the coming quarters. Some other risks include the lower demand for crude oil and natural gas, lower production, inflation, interest rates, fluctuations in foreign currency and exchange rates etc.

Financial overview of FY 2021 (In mn of CAD)

Source: Company Filing

• In FY 2021 the company posted its revenue of CAD 2,392.6 million, which stood higher against CAD 1,806.9 million in FY2020. The growth was supported by elevated propane prices coupled with the positive impact from acquisitions completed in the current and prior year.

• Cost of sales surged to CAD 1,479.9 million in FY2021 from CAD 893.2 million in FY2020, which resulted to a slight lower gross profit at CAD 912.7 million in FY21, compared to CAD 913.7 million in FY20.
• The period witnessed a rise in the total expense to CAD 889.8 million compared to CAD 786.6 million in FY2020, due to an increase in Selling, distribution and administrative costs and a surge in finance costs. This resulted in a lower Earnings before income taxes of CAD 22.9 million against CAD 127.1 million in FY2020.

• Net earnings stood higher at CAD 206.7 million, against CAD 86.8 million in FY20, due to lower income tax expense combined with higher earnings from discontinued operations (CAD 189.5 million v/s CAD 24 million in FY2020).

 Valuation Methodology (Illustrative): Price to CF-based

Analysis by Kalkine Group

Stock Recommendation

The company has a strong cash flow conversion rate of more than 79% in FY2021, amidst the pandemic, which indicates business resilience and is a key positive for the company, as it supports the overall liquidity. Moreover, the company expects Adjusted EBITDA in between CAD 410 million to CAD 450 million in FY22, reflecting a ~8% growth over FY21.  

Additionally, it completed an acquisition of Kamps Propane and Kiva Energy at the purchase price of approximately CAD 302 million and expects to generate approximately CAD 42 million in Adjusted EBITDA on a run-rate basis in the next 24 months.

Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 11.67 on March 25, 2022. Furthermore, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 25, 2022). Source: REFINITIV, Analysis by Kalkine Group

 Technical Analysis Summary:

Disclaimer

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