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Stock to watch: Superior Plus turnaround story fuelled by rising cash flow

While the Calgary-based company is more widely known as a propane distributor, it is also a specialty chemical maker and runs a construction product distribution business.

Superior Plus Corp. (SPB-TSX)

Tuesday's close: $12.67 a share

52-week trading range: $5.96 to $13.15 a share

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Annual dividend: 60 cents a share for yield of 4.7 per cent

Analysts' ratings: There were four buys, three holds and no sells, according to Bloomberg data. Target prices ranged from $12 a share as estimated by TD Securities analyst Damir Gunja to $14 a share by National Bank Financial analyst Patrick Kenny.

Recent history: Shares of Superior Plus have surged 77 per cent (including dividends) over the past year as the company restructured and pared down debt. While the Calgary-based company is more widely known as a propane distributor, it is also a specialty chemical maker and runs a construction product distribution business. Its stock went into a freefall in 2011 after the company chopped its annual dividend to 60 cents from $1.62 a share to reduce debt. Another headwind came last fall when Canada Revenue Agency challenged Superior Plus's purchase of $800-million in tax losses from Ballard Power Systems Inc. just before converting to a corporation from an income trust in 2008. But investor enthusiasm has increased since Luc Desjardins was appointed chief executive officer in late 2011, and began implementing changes to improve margins. He was formerly a partner with U.S.-based private equity firm Sterling Group. In March, Superior Plus did a $144-million stock issue with most of the cash used to reduce debt. Total debt to earnings before interest, taxes, depreciation and amortization (EBITDA) fell to 3.7 per cent from 4.4 per cent at the end of 2012.

Manager insight: Superior Plus is a turnaround in the making under a new management team that appears to be doing the right things, says Jean-François Tardif, a portfolio manager and founder of Timelo Investment Management Inc.

"Free cash flow in my mind should improve very nicely over the next two years," said Mr. Tardif who began acquiring Superior Plus shares in late February at an average cost of $12.04 a share. "The debt will go down, and the dividend will be increased. But I would not expect that [dividend hike] before the second half of 2014 or maybe even 2015."

Investors were probably overly concerned about the debt level in the recent past, he suggested. Even though the stock was plunging over the past two years, "the company generated $200-million in cash flow or about $100-million a year."

The cash flow yield ($200-million in cash flow divided by market capitalization of $1.6-billion) is 12.5 per cent, he noted. "If the cash flow goes to $250-million in two years, it could be a 15.6-per-cent free cash flow yield."

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Mr. Tardif expects to see improving margins on all Superior Plus's businesses, but is hoping that the company will be able to sell off its construction products business to reduce debt and improve its balance sheet further.

He is not too concerned about the tax dispute with Canada Revenue Agency even though it could cost Superior Plus about $50-million should it lose the case. "The company has about a $1.6-billion market capitalization," he said. "It does change potentially the tax paid in the future …but it doesn't change dramatically the present value of the company."

Over the next two years, he expects Superior Plus stock to generate a 20-per-cent annual return, including the dividend. "We are not trying to shoot for the moon," Mr. Tardif said.

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