Superior Plus Corp

Superior Plus Corp (TSX: SPB) is a diversified business corporation which operates mainly under Energy Distribution and Specialty Chemicals segments.

Key Highlights:

• Impressive Dividend Yield: The company has a solid track record of consistent dividend distribution, backed by stable cash flows. In H1FY21, the company reported higher dividends of CAD 75.2 million compared to CAD 52.5 million in pcp. Notably, the stock carries a dividend yield of ~5.04%, which is lucrative considering the current interest rate scenario.
• Lucrative macros: The company operates as a propane distributor across the North American Market, and the demand for the propane us attractive due to customer characteristics and there are ample opportunities for growth. Moreover, the propane market remains highly fragmented in nature, and provided significant opportunity for expansion through acquisitions.
• Elevated EBITDA: The company reported consistent growth in EBITDA since 2016, supported by streamlining Energy Distribution platform and reducing cyclicality and exposure to oil and gas end markets. Notably, EBITDA grew 26.5% on a CAGR basis since 2016.

Q2FY21 Income Statement Highlights:

• SPB announced its quarterly result, wherein the company posted revenue of CAD 6 million, up from CAD 305.5 million in the previous corresponding period (pcp). The increase was driven by higher revenue from both U.S. Propane Distribution and Canadian Propane Distribution segments.
• Gross profit slide to CAD 1 million from CAD 169.3 million in pcp. The decline was primarily due to the higher cost of sales (CAD 216.5 million v/s CAD 136.3 million in pcp).
• The quarter was marked by slightly higher selling and administrative costs (CAD 2 million v/s CAD 174.6 million in pcp), significantly higher finance expense (CAD 58.9 million v/s CAD 24.2 million in pcp), and lower gains on derivatives and foreign currency translation of borrowings amounting CAD 39.1 million v/s CAD 64.7 million in pcp.
• The company reported a net loss from continuing operations of CAD 1 million, as compared to a loss of CAD 0.1 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: Factors like sluggish economic scenario, decline in production profile due to lower demand, interest rate fluctuations, etc. would have a negative impact on the company’s performance. Moreover, the company’s operations might witness some setbacks due to the seasonality pressure during the second quarter and third quarters.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

For FY21, the company expects its Adjusted EBITDA to remain between CAD 390 to 420 million, which is higher than CAD 379 million in pcp. The company also expects its free cash conversion in between 80%‐85%, at par with the previous year of 83%. We have valued the stock using Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 14.29 on September 24, 2021.

One-Year Technical Price Chart (as on September 24, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Ensign Energy Services Inc.

Ensign Energy Services Inc. (TSX: ESI) is a Canada-based oil services company that offers services like drilling and well servicing, oil sands coring, directional drilling, underbalanced and managed pressure drilling, equipment rentals, transportation, wireline services, and production testing services. 

Key Highlights:

• Constant growth in drilling activities: Over the years, the company has improved its drilling activities, which has resulted in 2,500 wells and over 40 million feet drilled with Edge since 2016. The management expects the momentum to continue in the rest of FY21, supported by encouraging drilling activities primarily from the Canada and Australia region.

Source: Company Report

• Well established operation across the United States: The company derives majority of its income from the US operation, wherein the company operates with 93 rigs, within which more than 75% Permian fleet are high-spec rigs. Notably, the company operates through performance-based contracts, which also add to the company’s income generation. For the remaining FY21, the management expects its US activity to remain steady and continue to improve.
• Usage of technology for improved results: The company uses its Edge Automation platform and has been able to meet customer demands through continuous improvement in the performance and efficiency of existing oilfield services equipment. Continuation of the above trend is likely to retain its existing customers and would lead to new customer additions, which is a key positive.

Q2FY21 Financial Highlights:

• ESI announced its second quarter results, wherein revenue stood at CAD 212.306 million compared to CAD 194.759 million in the previous corresponding period (pcp). The revenue increase was driven by strong momentum from the Canada region, while the United States and International segments remained at par with the previous corresponding period.
• Adjusted EBITDA was recorded at CAD 45.645 million, declined from CAD 58.060 million in pcp. The decrease was primarily due to an increase in the total expense of CAD 248.550 million, as compared to CAD 237.823 million in pcp, primarily due to a surge in the oilfield expenses.
• Net loss widened to CAD 52.332 million, from a loss of CAD 17.237 million in the previous corresponding period (pcp).

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The group’s income is directly correlated to the performance of the oil & gas explorer. Changes in the capital spending or drilling activities by these would affect the company’s performance.

Stock Recommendation:

The management indicated that higher vaccination rates across the globe have contributed to the recovery of crude oil demand and subsequently resulting in meaningful crude oil inventory declines. Moreover, on a macro perspective, World Liquid Fuels Production & Consumption has gained pace in the recent past and is expected to improve in the coming quarters. As the economic activities are returning to normal levels, we expect the demand for oil and gas to improve, which would result in higher demand for the group’s offerings. On the valuation front, the stock is available an NTM EV to Sales multiples of 1.3x compared to the industry median of 2.0x. Hence, considering the above-mentioned facts, we give a ‘Hold’ rating on the stock at the closing price of CAD 1.88 on September 24, 2021.

One-Year Technical Price Chart (as on September 24, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.