Susser Petroleum Partners LP (SUSP) is a wholesale distributor of motor fuels that offers a very appealing risk/ reward profile at current levels. SUSP was spun-out of parent Susser Holdings Corporation (SUSS) by way of an IPO on September 19 and is structured as an MLP. SUSP's spinoff occurred during a flurry of other, higher profile spinoffs (Tyco International-Pentair-ADT, Kraft-Mondelez, Sears Holdings-Sears Hometown, Nacco Industries-Hyster Yale,etc). Since investor attention has been diverted elsewhere, an opportunity exists to buy a company with very appealing structural advantages and a stable, growing yield (currently 7%) at a substantial discount to its indicated value. There are several near-term catalysts that should lead to +50% share appreciation over the next two quarters with a potential total return of +75% over the coming 12 months.
At first glance, the favorable structural dynamics and earnings quality of the business are not readily apparent. SUSP is an MLP, but unlike most all other MLPs, SUSP does not have direct exposure to commodity fluctuations. Instead it primarily derives its revenue and cash flow from a fixed spread (~$0.04/ gallon) on the delivery of gasoline to stations. All fuel is sourced by its customers and all costs are passed through including maintenance capital expenditures. The only variable, volumes delivered, has historically exhibited low volatility. Over 90% of fuel volumes are sold pursuant to long-term (10+ year) contracts.
As part of the IPO, SUSP received 53 of the newest stations in parent SUSS's network and has the right to acquire the remaining 22 recently constructed locations through a sale-leaseback. These properties were purchased/ dropped down to the company at cost. SUSP's most appealing structural quality, however, is its ability to buy real estate at an 8% cap rate with 2% borrowings. The company has zero net debt and $250M of capacity on its revolving credit line to finance future sale-leasebacks and concurrently improve its capital structure. As its real estate holdings grow it will be closer to a REIT than the typical midstream MLP. This makes SUSP somewhat of an unconventional and is likely another reason this mis-pricing exists.
SUSP's largest customer is its parent, SUSS (59% of LTM gallons sold). SUSS operates 550 Stripes branded convenience stores for which SUSP is the exclusive fuel supplier. All terms with SUSS are secured by a 15-year contract. As Stripes and SUSS grow store count, SUSP will benefit by not only having the right to purchase the property at an 8% cap rate, but also from the fuel delivery business that accompanies it. This is an important detail since it makes the aggregate yield on a property well above 10%.
SUSS's 1,118 store footprint and consequently SUSP's distribution network is the largest in Texas. This store count has grown at a 9% CAGR since 2000 with SSS among its newer locations are growing at 8%. Driven by market share increase and regional demand growth, organic fuel sales per store have increased at a 4.1% CAGR over the last five years. This network also has the highest level of fuel volume per store of any significant operator in the Southwest and perhaps the nation. Average per-store fuel gallons sold by SUSS network came to 1.5M LTM vs public peers PTRY and CASY at 1.1M and 0.8M, respectively. SUSS and SUSP benefit both from favorable economic trends in Texas and also significant regional economies of scale. While it has reached scale in the region, the rest of the market is highly fragmented. This affords SUSS/SUSP a competitive advantage on cost and also plenty of acquisition-driven growth opportunities. This is laid out it in further detail in the company's investor presentation.
SUSP's market cap is $595M and EV is $597M ($25 share price, 23.8 fully-diluted units outstanding, $2.4M net debt). The company trades at a 7.0% present dividend yield and an 8% forward yield based on company guidance. SUSP's stable profile provides it one of the highest quality cash flow streams among all MLPs. The most appropriate MLP comps based on stability of cash flow are Megellan Midstream (MMP), El Paso Pipeline (EPB) and Spectra Energy (SEP) which trade at a 4.2%, 6.1% and 6.2% yields, respectively. If SUSP had a 5% current yield, the stock would trade for $35, 40% above the current price. However, SUSP has a more appealing growth profile than those MLPs. At a forward yield of 5%, SUSP would trade at $41, 65% above the current stock price. The company has close to net debt, so can further grow its payout by adding leverage.
Alternatively, if you look at SUSP as a REIT, the closest comparison is convenience store and gas distributor Getty Realty (GTY). Though a less appealing business given it operates stores and has a smaller mix of contracted revenue, GTY trades at 19.4x EBITDA and 16.8x FFO with a 2.7% dividend yield. If you include better performing retail-oriented triple net lease REITs National Retail (NNN) and Realty Income (O), the group trading median is 19.2x EBITDA and 18.2x FFO with a 4.4% dividend yield. If these metrics were applied to SUSP, the implied stock price would be $35 (40% premium to current), $31 (22% premium) and $40 (60% premium).
The parent Susser Holdings has been in operation since the 1930s. CEO Sam Susser has historically been a disciplined and conservative capital allocator. Since SUSP ultimately only holds real estate and distribution contracts, it is insulated from any operational risks associated with managing a station or fleet of trucks. The company's operating performance is also largely protected from inflation since all costs are passed through to customers. Investors also get downside protection for the stable yield which should provide a floor for the stock price.
Investor awareness of this opportunity will come from: 1) sell-side research initiation following the expiry of the quiet period on November 3rd; 2) improving its capital structure through real estate drop downs from the parent financed by increased borrowing and; 3) demonstrated growth and sustainable cash flow generation for shareholders. Further, technical share purchases from MLP funds and indices should lead to near-term price appreciation. It is worth noting that Baron Capital is already a 10% shareholder. Once SUSP grows its cash flows and trades to an appropriate yield over the next 12 months, the total return is in access of 75% from the current stock price.