Spin-off Unlocks Value of Susser Holding

In my last article, I talked about the spin-off of Susser Petroleum Partners (SUSP) by Susser Holdings (SUSS). Although SUSP is now fully valued, SUSS, the parent, is significantly undervalued.

Business

SUSS operates 552 ”convenience stores in Texas, New Mexico and Oklahoma, offering merchandise, food service, motor fuel and other services.” They also have a 50.1% stake in SUSP with the subordinated units they hold. 

The convenience store business is very competitive and cyclical. Profits are affected by the economy, and the price of fuel. On the merchandise side, SUSS has been doing very well. They have increased same store sales every year for the last 5 years and have increased gross margins since the start of 2010. Fuel margins have been up and down since 2007.

Check out the results of operations for the last 5 years and 6 months of 2012 below. In 2011, they had a one time charge of $24.2 million related to debt refinancing.  

Susser Holding Result of Operations

Susser Holding Result Of Operations


Susser Holding 2012 results

Susser Holding 2012 results

Valuation

At the current price of around $35, SUSS has a market capitalization of around $720 million. However, around $450 million of that value consists of the spin-off, SUSP. SUSS will get over $200 million from the spin-off proceeds, and they have 10.94 million subordinated units which I valued at around $250 million (10% discount to common unit price of $25.34).

So, the market is valuing the rest of SUSS at $270 million ($720-$450). Trailing 12 months, the retail business had a net income of $30 million. However, it also had a depreciation expense of around $50 million. Only $15 million of that is used to maintain existing stores and for the wholesale business. The $35 million would be free cash flow if the company did not use it to construct new stores.

So, SUSS really has about $65 million in free cash flow ($30 million net income + $35 million spent on constructing new stores). That means it is trading at around 4 time free cash flow. If it trades at 8 times free cash flow, the stock price would go to $47/share. 

Faster Growth 
 
One thing that I did not take into account in the valuation is the faster growth SUSS will experience due to the spin-off.  SUSS’s growth has been inhibited by the high cost of constructing stores. It takes about $3 million to construct a store. With the $65 million free cash flow, the company can construct about 20 stores. The company has over 550 stores. So, the 20 stores would only represent a 4% growth in stores.
 
However, after the spin-off, SUSS will do sale-leasebacks with most new stores it constructs with SUSP at a fixed 8% rate of the sale price. This will allow SUSS to grow much faster than it has in the past because it will not need as much free capital.
 
Risks

There are risks associated with this stock.

  • The industry is very competitive. Earnings could fluctuate from year to year. This is why I have only attached a reasonable 8 times free cash flow valuation.
  • They could make irrational decisions with the proceeds from the IPO. However, the company seems to be very shareholder friendly and has made good decisions in the past. I believe either they will buy back shares, reduce the $450 million debt due in 2016 or make an acquisition. 

 Conclusion

I have initiated a small position at $34.85 and will buy more if the price goes down. 

Disclosure: I am long SUSS.

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