At 4.9 times enterprise value to EBITDA, dividend yield of 5.9%, Star Gas Partners, L.P. represents very good value at these prices. I do not want to repeat some of the facts mentioned in previous write-ups but you can find them here in VIC. I am writing the recent major pieces of information that have come since the last write-up in 2010.
The company is coming out of a series of positive events.
Recent quarter results
In the most recent quarter, SGU's financials improved in many fronts. It posted net income of $19.2 million or $9.5 million more than the prior year. Adjusted EBITDA increased by 4.9 million to 35.8 million. Volume increased by 6.6 million gallons or 6.8%. The improvement is good, even after considering the impact from acquisitions, 5.5% colder temperatures and a return to more normal consumption patterns by customers impacted by Sandy last year.
Customer growth for the first time in many years
Customer metrics improved. For the first time in several years, customer churn was positive, i.e. there was positive customer growth. During the quarter just ended, SGU actually grew its customer base by some 3,100 accounts or nearly 1%. Management attributed this positive result to the positive impression customers felt from SGU's response to Sandy last year as well as this year as the cold came in. SGU's customer service and delivery of services retained customers and attracted other companies' customers as competitors falter.
Acquisition of Griffith should be sizable and accretive
SGU is acquiring Griffith, which gives SGU three things.
1) substantial annual normalized ebitda of $13-$14 million, this represents almost 15% of the EBITDA
2) complimentary business from customers in geographic areas that feel the gap between New York Maryland Virginia and North Carolina.
3) savings from legal, professional, accounting should be accretive
SGU is buying Griffith Energy Services, Inc. ("Griffith") of Columbia, Maryland from Central Hudson Enterprises Corporation. Griffith services customers in Virginia, West Virginia, Delaware, the District of Columbia, Maryland, and Pennsylvania. SGU is acquiring Griffith, one of the 12 companies targeted by SGU in several years, at 5.1 times EBITDA plus working capital. (At today's stock prices you can buy SGU at 4.8 times EBITDA, not to mention that SGU is public and a liquid investment.)
Prior to this acquisition, SGU operated in New York, Maryland, Virginia and North Carolina. Griffith's geographic locations will fill the gap between the Northeast and North Carolina. The synergies from efficiency of delivering the services in these gaps, plus the savings in legal, accounting and professional expenses, should provide some growth to the EBITDA in addition to the simple sum of Griffith's existing 13-14 million to SGU's current 95 million of EBITDA.
On February 10, 2014, CEO Steven Goldman bought 2,000 shares of SGU at 5.6 per share for total amount of $11,200. Steven Goldman's compensation in 2013 includes a salary of $321,000 and $372,000 in other compensation. As they say managements sell stock for a lot of reasons but buy stocks usually because they think the stock is going up. (The only exception, I have seen, is when management is promoting the stock for a fund raise. In this case, I do not see a fundraising in the near future)
Cheap compared to comps
There are no other public heating oil distributors and the best comps for SGU are the propane distributors APU, FGP and SPH. Comps trade at 8 to 12 times EBITDA multiple.
SGU is no stranger to old members of VIC. Prior to the current management, SGU was mismanaged and went from a yield play to a distressed play. Since then the current management has demonstrated a record of shareholder friendly policies, and common sense management through share buybacks and disciplined acquisition strategy.
SGU has reduced outstanding shares from 75 million to 58 million from 2009 to 2013 through share repurchases
Disciplined acquisition strategy
Well they are constantly talking to potential sellers, SGU has demonstrated discipline. SGU's last acquisition before Griffith was in 2010. In the most recent quarterly call, management gave color to their acquisition strategy. My subjective view of management is they are disciplined buyers.
I do not hold a position with the issuer such as employment, directorship, or consultancy. Neither I nor others I advise hold a material investment in the issuer's securities.
- Accretive Acquisition at a valuation lower than you are buying SGU at today's prices.
- Insider buying by the CEO
- Positive Growth of Customer Churn for the first time in several years