Description
The last several SGU VIC write-ups provide background, with bgm’s the most useful.
SGU trades at 8%-10% of my range of recurring free cash flow and has valuable take-out optionality.
This range stems mainly from the free cash flow sensitivity to gallon attrition.
Under my worst free cash flow assumptions of gallon attrition, (which is 6% of home heating oil and propane), free cash flow would fall to 3% of current price, probably causing a large share price fall.
Using the last 3 year average attrition of 3%, the recurring free cash flow yield is 11%.
So buying SGU is a bet that attrition remains near 3% and/or that SGU is bought by a competitor.
|
year #
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
|
fiscal year
|
2015
|
2014
|
2013
|
2012
|
2011
|
2010
|
2009
|
2008
|
|
total gallons sold (includes other petroleum)
|
484
|
447
|
384
|
330
|
399
|
347
|
387.4
|
399
|
|
gallon attrition
|
9.3
|
6
|
10
|
21
|
11.7
|
12.4
|
29
|
22
|
|
attrition as % of previous year heating oil & propane gallons
|
2.6%
|
1.8%
|
3.6%
|
5.9%
|
3.8%
|
3.5%
|
7.3%
|
5.8%
|
|
average attrition as % of previous year heating oil and propane gallons
|
4.3%
|
|
|
|
|
|
|
|
|
gross profit
|
471
|
407
|
353
|
298
|
354
|
309
|
331
|
285
|
At 4.3% average future attrition, the average annual gallons lost would be 15.2MM.
SGU avg gallon acquisition capex since 2009 is $2.1/gallon, so replacing such attrition requires $34MM of annual capex
Using avg EBITDA per gallon since 2010, which has varied less than 3% when one normalizes for change in heating oil price (heating oil margins expand when heating oil price declines and vice versa) and weather, SGU’s free cash flow yield approximates 8% as follows:
| |
2015 total gallons sold
|
484
|
| |
avg gallons lost in 2016 but repurchased in 2016
|
15.18
|
| |
2015 Delivery and Branch expense stays flat in 2016
|
309
|
| |
Delivery and Branch expense per gallon
|
0.64
|
| |
Avg gross profit per gallon
|
0.914
|
| |
EBITDA per gallon pre corp G&A
|
0.276
|
|
|
future EBITDA pre corp G&A
|
134
|
| |
Capex to replace gallons
|
34
|
| |
other capex (my estimate)
|
10
|
| |
G&A
|
26
|
| |
tax d&a (my estimate)
|
38*
|
| |
interest exp
|
4
|
| |
finance charge income+derivative expense
|
3
|
| |
EBT
|
68
|
| |
taxes
|
29
|
| |
FCF
|
33
|
| |
shares out
|
57.5
|
| |
FCF per share
|
0.58
|
*Over time, tax book d&a would increase to $44MM, which is total capex, increasing FCF per share to $0.62
So on avg, an SGU shareholder should earn an inflation protected ~8% return while waiting for a take-out.
Why is a take-out likely?
Because similar distributors with lower cost of capital would realize synergies.
BGM’s write up explains:
“Comps: There are no other public heating oil distributers and the best comps for SGU are the propane distributors APU, FGP and SPH which trade at EBITDA multiples of 8-12x.”
SGU, in its largest acquisition since 2011, paid $71MM excluding working capital for 26.5MM gallons in 2014, or $2.6 per gallon.
Applying this $2.6 per gallon only to SGU’s 2015 heating oil gallons sold of 384MM implies a share price of $16. SGU’s other gallons generated $30MM in 2015 gross profit.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
fcf yield and/or take-out