In response to a recent request from an Inner CircleMember, Pat McKeough discusses recent developments at Superior Plus (known as Superior Propane in Canada). Two new acquisitions promise to stimulate cash flow and cash savings. Yet Pat points to three areas in which the company faces risk, including competition from lower natural gas prices.
Q: Dear Pat: I would appreciate TSI’s advice on Superior Plus Corp. Thank you.
A: SUPERIOR PLUS CORP. (symbol SPB on Toronto; www.superiorplus.com) distributes propane in Canada and the U.S. It also produces and distributes specialty chemicals, including sodium chlorate and chlor-alkali, which are used for bleaching pulp (wood fibres).
The company’s propane business operates under the Superior Propane name in Canada and the Superior Plus Energy Services name in the Northeastern U.S. Overall, those operations account for 77% of the company’s revenue. Superior’s specialty chemicals business has eight production facilities in North America and one in Chile. Those operations account for 23% of overall revenue. Superior is the world’s second-largest producer of sodium chlorate.
The company had a third business segment—its Construction Products Distribution operations—until August 2016. It then sold it for $325 million U.S. That business distributes drywall and other construction materials. Superior used the proceeds of the sale to pay down its debt.
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Growth stocks: Gibson acquisition to produce cost savings of $20 million
On March 1, 2017, the company announced it would spend $434.8 million to buy the Canwest industrial propane business of Gibson Energy (symbol GEI on Toronto). The acquisition is expected to close in the second half of 2017. The deal should produce $20 million in annual cost savings by 2020 and immediately add to Superior’s cash flow.
The company made a second, smaller acquisition on April 20, 2017: it bought Pomerleau Gas Propane Inc. for $10.8 million. That propane distributor supplies both residential and commercial customers in Quebec.
Superior’s revenue rose 19.9% in the quarter ended March 31, 2017, to $675.7 million from $563.5 million a year earlier. Cash flow per share rose 37.5%, to $0.77 from $0.56. The gains were thanks to higher propane prices and improved sales of chlor-alkali.
The stock currently trades at just 7.1 times Superior’s forecast 2017 cash flow of $1.60 a share. It also yields a high 6.4%.
However, the company faces a number of risks:
Due to the Canwest purchase, Superior’s total debt is $935.9 million—up from $541.7 million at the end of 2016. That equals a high 55% of the $1.7 billion market cap; it also adds considerable risk.
In addition, propane has diverse residential and commercial uses, but most propane users switch to natural gas when gas prices fall. That means Superior faces gradual shrinkage in its already-competitive market.
The company’s move into the cyclical pulp and paper chemicals industry also adds risk.
Inner Circle recommendation: We don’t recommend Superior Plus Corp.
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