The 'The Company Delivers' Program Will Drive Operational Improvements And Future Profitability

Key Takeaways

• Superior Delivers initiative is projected to boost operational efficiency and customer growth, enhancing both revenue and profitability long term.
  
• Strategic focus on performance optimization at Certarus and capital allocation is likely to improve earnings and margins as market conditions get better.
  
• Operational challenges and strategic adjustments could hinder growth, with weather impacts and shifting capital strategies adding uncertainty to revenue and investor sentiment.

Catalysts

Distributes propane, compressed natural gas, and renewable energy and related products and services in the United States and Canada.

• The launch of Superior Delivers, a transformative initiative, aims to drive operational improvements and customer growth, contributing an estimated $20 million to EBITDA in 2025 and setting a foundation for future revenue and profitability growth.
  
• Strategic shifts in capital spending and operations at Certarus to focus on optimizing performance and strengthening free cash flow, setting up potential for future earnings and margin improvements as market conditions improve.
  
• Aggressive share repurchase program, with plans to buy back about 10% of outstanding shares, is expected to increase EPS as it will reduce the share count and is predicted to be a more efficient use of capital given the current share price.
  
• Superior's plan to double free cash flow by growing EBITDA and reducing capital expenditures provides potential for increased balance sheet strength and financial flexibility, impacting future earnings positively.
  
• Expected growth in propane segment driven by the Superior Delivers program alongside improved market conditions, including normalized weather patterns, is anticipated to increase revenue and support EBITDA growth.

Superior Plus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Superior Plus's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.5% today to 4.7% in 3 years time.
• Analysts expect earnings to reach $135.5 million (and earnings per share of $0.47) by about April 2028, up from $-36.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, up from -30.7x today. This future PE is lower than the current PE for the CA Gas Utilities industry at 20.5x.
• Analysts expect the number of shares outstanding to decline by 4.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Superior Plus Future Earnings Per Share Growth

Risks

• Superior Plus has faced recent operational challenges, revealing that the company had outgrown its operating capability due to previous mergers and acquisitions, which could impact revenue growth and profitability if not managed properly.
  
• The transformation initiative 'Superior Delivers,' although promising, requires time and may not yield immediate results. This delay can affect short-term earnings and margin improvements.
  
• Warmer-than-expected weather has negatively impacted propane sales, leading to lower revenues and EBITDA in 2024. Continued unpredictable weather could further impact the company's revenue projections.
  
• The capital allocation strategy shifting away from dividends to share repurchases has altered the shareholder base, which may cause uncertainty and affect investor sentiment toward earnings stability and growth.
  
• Tariff threats, inflation, and potential higher interest rates are not factored into the guidance, posing risks that could increase costs and pressure net margins if they materialize.

Valuation

• The analysts have a consensus price target of CA$9.775 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$7.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.9 billion, earnings will come to $135.5 million, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 6.8%.
• Given the current share price of CA$6.75, the analyst price target of CA$9.78 is 30.9% 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.