INVESTMENT THESIS
Suburban Propane Partners L.P. (NYSE: SPH). We note that industry trends for propane companies are now improving and that the company posted a narrower-than-expected fourth-quarter loss. We believe that another positive surprise may be in store when SPH reports results for 1Q21 results. In addition, we think that the recent dividend cut was prudent and note that the stock still yields more than 7%, which is attractive in a low-interest-rate environment.
Our long-term rating remains SELL based on our expectations for limited earnings growth over time.
RECENT DEVELOPMENTS
Fiscal 4Q revenue fell 3.5% to $166 million. The decline reflected an 8% decline in sales of fuel oil and related fuels and 3% lower propane revenue, offset in part by slightly higher other revenue.
In FY20, revenue fell 13% to $1.1 billion, while earnings fell to $0.98 per common unit from $1.11 in FY19. The results reflected warmer-than-usual weather and weaker consumer demand.
EARNINGS & GROWTH ANALYSIS
Reflecting the better-than-expected third- and fourth-quarter results, management’s ability to manage costs, solid demand for propane, and prospects for higher operating margins over the next several quarters, we are raising our FY21 earnings estimate to $1.20 from $1.16 per common unit.
FINANCIAL STRENGTH & DIVIDEND
On March 5, 2020, the company entered into an amended agreement for its $500,000 revolving credit facility, of which $145,100 was outstanding as of March 28. The amended agreement extends the maturity of the facility and amends certain covenants, including an increase in the maximum permitted tota consolidated leverage ratio to 5.75 from 5.50.
The new dividend was paid on August 11 to shareholders of record as of August 4. At current prices, the shares yield about 7.5%, down from 16.6% prior to the dividend reduction. We expect the savings from reduced dividend payments to be used to pay down debt. Our dividend estimates are $1.20 for FY21 and $1.40 for FY22.
In 3Q20, Suburban Propane Partners tapped its operating cash flow to repay $35 million on its revolving credit line, which lowered debt outstanding to $110 million at the end of 3Q20. The 61% increase in adjusted EBITDA during the quarter led to an improvement in the leverage ratio to 4.8.
MANAGEMENT & RISKS
Michael Stivala became the company’s CEO in September 2014 following the retirement of Michael Dunn. Mr. Stivala had served as CFO since 2007.
Suburban’s strategy of acquiring peers adds integration risk, as well as the possibility of overpaying for assets. In addition, the company’s earnings are typically seasonal, with large gains in the first and second quarters followed by operating losses in the third and fourth quarters. SPH also faces economic uncertainty related to COVID-19.
COMPANY DESCRIPTION
Suburban Propane Partners L.P. is a publicly traded master limited partnership. Headquartered in Whippany, New Jersey, SPH has been engaged in the retail propane business since 1928. The partnership serves approximately 1.0 million customers and operates through more than 700 locations in 41 states.
VALUATION
Over the last 52 weeks, SPH has traded between $9 and $23. The shares now trade at 13.3-times.
On November 23, HOLD-rated SPH closed at $16.03, up $0.08.
