Organic Growth Strategies Will Transform Propane Business By 2027

Key Takeaways

• Superior Plus is emphasizing organic growth and operational efficiency over acquisitions to realize sustainable revenue growth and enhanced earnings.
  
• Reducing dividends to increase free cash flow for strategic investments aims to boost earnings per share and improve shareholder returns.
  
• The shift to a balanced capital allocation and reduced dividends may limit growth and shareholder satisfaction amid high leverage and competitive pressures.

Catalysts

Distributes and markets propane, compressed natural gas and renewable energy in both the United States and Canada.

• Superior Plus plans to transform its propane business through the Superior Delivers initiative, aiming for $50 million in incremental EBITDA by 2027 from organic growth, cost efficiencies, and optimized capital allocation. This should enhance both revenue growth and net margins.
  
• The company is realigning its strategy to focus less on acquisitions and more on organic growth, leveraging its existing market footprint to improve operational efficiency and customer retention. This shift should lead to sustainable revenue growth and improved earnings.
  
• Implementation of a new performance management system with aggressive performance objectives aims to drive operational excellence and cost reductions, directly impacting profitability and net margins.
  
• Certarus' position as a leader in the CNG sector is expected to benefit from emerging energy market demands, which should support long-term revenue growth and expansion into new verticals like power generation.
  
• A significant reduction in dividends will free up approximately CAD 135 million in additional free cash flow annually, intended to enhance capital flexibility for share buybacks and investments in growth opportunities, potentially boosting EPS and providing better shareholder returns.

Superior Plus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Superior Plus's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.7% today to 4.6% in 3 years time.
• Analysts expect earnings to reach $140.3 million (and earnings per share of $0.63) by about February 2028, up from $16.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.1x on those 2028 earnings, down from 61.1x today. This future PE is lower than the current PE for the CA Gas Utilities industry at 41.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

Superior Plus Future Earnings Per Share Growth

Risks

• The company's shift from growing through acquisitions to a more balanced capital allocation approach may limit rapid revenue growth, especially if organic growth initiatives like Superior Delivers do not yield the expected results.
  
• The current leverage of 4.0x is above the target of 3.0x, which could constrain financial flexibility and investments necessary for growth, potentially impacting net earnings.
  
• Reducing the dividend by 75%, although strategically sound for long-term investment, might lead to shareholder dissatisfaction and affect stock demand negatively in the short term, impacting share value.
  
• Existing structural challenges in the propane business suggest potential difficulties in achieving sustainable growth and profitability, which could hinder revenue and net margin improvements.
  
• Increased competitive pressures, particularly in the energy solutions sector, may narrow margins for Certarus and affect revenue growth if the company does not swiftly adapt to market dynamics.

Valuation

• The analysts have a consensus price target of CA$9.068 for Superior Plus based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$12.0, and the most bearish reporting a price target of just CA$6.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.0 billion, earnings will come to $140.3 million, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of CA$6.01, the analyst price target of CA$9.07 is 33.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.