Distribution Sustainability at Risk: DOWNGRADING to UNDERPERFORM (from Outperform); Lowering TP to $44 (from $64).
Downgrading to Underperform (from Outperform): The deterioration if NS' asphalt and fuels marketing segment continues to surprise to the downside and more than offset the growth in its fee-based storage and transportation segments. As a result, we do not believe NS will be able to cover its distribution in 2013 and beyond. Combined with an over-levered balance sheet, we believe the sustainability of NS' distribution is now at risk. Our $44 target price (from $64) reflects this risk and provides for a -3% total return over the next twelve months.
Forecasting Distribution Coverage Below 1.00x Until 2016: Based upon management's guidance for 2013, we forecast a distribution coverage ratio of 0.81x in 2013. In our view, digging out of this ~$80mm hole will be an uphill battle and requires ~$1,000mm of organic capital spend. Given NS' limited balance sheet capacity, the company's ability to execute organic growth projects may be constrained. All told, we do not forecast NS to cover its distribution again until 2016.
Leverage Poses a Risk to the Sustainability of the Distribution: Despite the potential to grow its way back to a 1.0x distribution coverage, we believe NS' over-levered balance sheet puts the distribution at risk. We forecast NS to approach its 5.0x debt/EBITDA covenant in 4Q12 which may force the company to either issue high-cost equity or cut its distribution. In either case, we believe the stock will be pressured until this issue is addressed.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
