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.
total gallons sold (includes other petroleum)
attrition as % of previous year heating oil & propane gallons
average attrition as % of previous year heating oil and propane gallons
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
avg gallons lost in 2016 but repurchased in 2016
2015 Delivery and Branch expense stays flat in 2016
Delivery and Branch expense per gallon
Avg gross profit per gallon
EBITDA per gallon pre corp G&A
future EBITDA pre corp G&A
Capex to replace gallons
other capex (my estimate)
tax d&a (my estimate)
finance charge income+derivative expense
FCF per share
*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.