On today’s Breakouts report, there are 38 stocks on the positive breakouts list (stocks with positive price momentum), and 21 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a dividend stock that has been a laggard, declining 15 per cent year-to-date - Superior Plus Corporation (SPB-T). Last week, the stock appeared on the negative breakouts list with the share price closing at a 52-week low. Given this decline, the stock is trading at an attractive valuation.
Last night, the company reported better-than-expected first quarter financial results with the share price rallying today. Analysts anticipate the share price will continue to recover. Based on the average target price, the stock has an anticipated one-year total return (including the 7-per-cent dividend yield) of over 40 per cent. The share price may gain traction in the second half of the year after the planned purchase of Certarus Ltd. has been completed.
A brief outline on Superior is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Toronto-based Superior Plus has three reporting segments: Canadian Retail Propane Distribution, U.S. Retail Propane Distribution, and North American Wholesale Propane Distribution. The company distributes propane to over 900,000 customers across North America.
There is seasonality in the company’s operations with most earnings generated in the first and fourth quarters (cold weather increases propane demand) with the highest earnings realized in the first quarter.
In December of 2022, the company announced the purchase of Certarus Ltd. for approximately $1-billion. Certarus is a distributor of compressed natural gas, renewable natural gas, and hydrogen across North America with roughly 85 per cent of its revenue stemming from the U.S. The acquisition is expected to be completed this quarter.
Investment thesis
- Market leader. Superior is the largest propane distributor in Canada and the fourth largest retail propane distributor in the United States.
- Diversifying its operations. With the pending acquisition of Certarus, Superior will expand its operations beyond propane to low carbon energy sources such as compressed natural gas.
- Steady cash flow generation.
- Recession resistant business. Demand is closely tied to the weather more than economic growth.
- Attractive dividend yield. Currently yielding over 7 per cent.
- Stable monthly dividend. The dividend has remained at the same level (72 cents per share annually) since 2014.
- Earnings growth. Management targets earnings before interest, taxes, depreciation and amortization (EBITDA)of $700-million by 2024. In 2022, the company reported adjusted EBITDA of $450-million. With the planned acquisition of Certarus, adjusted EBITDA is anticipated to come in at between $620-million and $660-million in 2023.
- Acquisition growth. Continued expansion in the fragmented US market.
- Inexpensive valuation: Trading at a discount relative to historical levels.
- Share price is hovering around the lower end of its long-term trading band.
- Potential key risks to consider: 1) Upon closing, Certarus shareholders will own roughly 17 per cent of the combined company and some shareholders may sell shares of Superior Plus; 2) high interest rates creating other investment options for investors seeking income; 3) risk of stagflation (low economic growth and high inflation environment) or a potential future recession..
Quarterly earnings
After the market closed on May 9, the company reported better-than-expected first quarter financial results.
Adjusted EBITDA came in at $272-million, ahead of the consensus estimate of $263–million, and up 9 per cent year-over-year. Adjusted operating cash flow (AOCF) was $1.05, down from $1.13 reported during the same period last year. The company’s leverage ratio improved, declining to 3.9 times from 4.1 times at the end of 2022. Management targets a long-term leverage ratio of between 3.5 times and 4 times.
Management lifted its guidance pro forma 2023 adjusted EBITDA outlook, including the acquisition of Certarus, to between $620-million and $660-million, up from its previous guidance of between $585-million and $635-million. Adjusted EBITDA from Certarus is anticipated to be between $175-million and $185-million in 2023, up from its prior outlook of between $140-million and $150-million.
Dividend policy
The company pays its shareholders a quarterly dividend of 18 cents per share, or 72 cents per share on a yearly basis. This equates to a current annualized yield of 7 per cent.
The company has paid investors 72 cents per share annually since 2014.
Analysts’ recommendations
The company is actively covered by 11 analysts, of which eight analysts have buy-equivalent recommendations and two analysts have neutral recommendations. CIBC is currently restricted on the stock.
The following firms provide research coverage on the company: ATB Capital Markets, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Cormark Securities, Desjardins Securities, iA Capital Markets, National Bank Financial, Raymond James, RBC Dominion Securities and Scotiabank.
Revised recommendations
Target prices have been relatively stable.
Last month, Desjardins’ Gary Ho increased his target price to $13 from $12.50.
Financial forecasts
The consensus EBITDA estimates are $582-million in 2023, up from $449.8-million reported in 2022, and forecast to rise to $673-million in 2024.
Earnings estimates have been rising given the planned acquisition of Certarus. For instance, at the beginning of the year, the consensus EBITDA estimates were $556-million for 2023 and $581-million for 2024.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 6.9 times the 2024 consensus estimate, below the five-year historical average of 8 times.
The average one-year target price for Superior Plus is $13, implying the share price may appreciate 36 per cent over the next 12 months. When combined with the 7 per cent yield, this equates to a potential total return of over 43 per cent over the next year. Individual target prices provided by 10 analysts are as follows in numerical order: three at $12, $12.50, three at $13, $13.50, $14, and $15 (RBC’s Nelson Ng).
Insider transaction activity
Year-to-date, one insider has reported trading activity in the public market.
On March 8, chief operating officer of North American Propane Distribution Andy Peyton bought 7,200 shares at an average price per share of approximately US$8.28. The cost of this purchase exceeded US$59,000.
Chart watch
The stock has been a laggard. Year-to-date, the share price has declined 15 per cent, underperforming the S&P/TSX Utilities Index that is up 9.5 per cent.
Looking back to 2006, the share price has largely traded between $9 and $16. The stock price is currently at the lower end of this trading range.
Looking at key technical support and resistance levels, the stock is approaching strong support around $9. On a recovery, shares of Superior face major resistance around $12. After that, there is a ceiling of resistance around $13.50.
ESG Risk Rating
According to Sustainalytics, Superior Plus has an ESG (environmental, social and governance) risk rating of 32.2 as of April 13, 2023. A rating of between 30 and 40 reflects a ‘high’ risk rating.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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Jennifer Dowty