Recession-Free Business Model, Impressive Dividend Yield: Superior Plus Corp. (TSX: SPB) is a Canada based diversified business group, which operates across two reportable segments, namely Energy Distribution, and Specialty Chemicals. The company distributes propane and distillates under energy distribution segment.  While the group is in the production and distribution of specialty chemicals via its specialty chemical segment.

The group announced a monthly dividend of CAD 0.06 per share, which remained unchanged from the previous month, payable on May 15. The company announced that it expects propane demand to stay stable irrespective of the economic environment. Moreover, the company’s specialty chemical segment is operating at same capacity despite the outbreak of COVID 19. The company will announce its first quarter FY20 results on May 13, 2020.

FY19 Financial Highlights: For the period ended December 31, 2019, SPB posted revenue of CAD 2,852.9 million, up 4% on y-o-y basis. The increase was driven by growth in U.S. Propane Distribution, Canadian Propane Distribution and Specialty Chemicals segments followed by the positive impact of acquisitions. Meanwhile, decline in wholesale propane prices coupled with weaker domestic currency remained a drag. Adjusted EBITDA stood at CAD 524.5 million, witnessed a solid growth of 40% over FY18, driven by an improved operating performance in the propane segment, partially offset by higher operating costs and lower Chlor-alkali sales. Net cash flows from operating activities stood at CAD 423.2 million, as compared to CAD 263.0 million majorly driven by the impact of positive net earnings and positive change in non-cash operating working capital, partially offset by higher interest and income taxes. The company reported net earnings of CAD 142.6 million, as compared to a loss of CAD 34 million in FY18.

FY19 Financial Highlights (Source: Company Reports)

Valuation Methodology (Illustrative): Price/Cash Flow based approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of SPB has corrected ~21% during the last one year and currently trading at CAD 9.37 with a market capitalization of ~CAD 1.64 billion as on 24 April 2020 market close. The U.S. propane industry had a marginal impact on the volume during the last recession, and the demand remains intact irrespective of the economic cycles. The company recently announced that its energy distribution remains resilient with demand for propane being stable. Notably, the energy distribution business accounts for majority of the company’s profitability, which is likely to ensure steady cash flows and dividends. Further, the company’s specialty chemicals business is operating at the same capacity, which is encouraging. Currently, SPB stock offers a lucrative dividend yield of 7.68%. We have valued the stock using P/CF-based relative valuation method and consider companies such as Olin Corp (NYSE: OLN), Boyd Group (TSX: BYD) and AltaGas Ltd (TSX: ALA) etc. as peer group and arrived at a target price offering lower double-digit upside potential (in % terms). Given the company’s strong business and attractive dividend yield, we recommend a ‘Buy’ rating on the stock at closing market price of CAD 9.37 as on April 24, 2020.

SPB Daily Price Chart (Source: Thomson Reuters)

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