Analyst Insights

Citi Research Highlights Sunoco's Growth Potential: Maintains Buy Rating

Citi sets a price target of $65, driven by strong 2Q24 EBITDA projections and strategic acquisitions

By Harrison Wall

7/10, 17:50 EDT


Stock Rating: Buy
Revised Price Target: $65.00
Stock Price (July 9, 2024): $56.74

Summary Points

  • Sunoco's 2Q24 EBITDA is projected to reach $360 million, driven by the NS acquisition and strong seasonal gasoline demand.
  • Citi maintains a "Buy" rating with a $65 price target, implying a 20.7% total return including dividends.
  • Recent acquisitions have diversified SUN's cash flows and improved its credit profile, supporting future growth strategies.

Introduction to a New SUN: 2Q24 Earnings Preview

Citi Research's latest report on Sunoco LP (SUN) provides a comprehensive preview of the company's 2Q24 earnings, highlighting the transformative impact of recent acquisitions and strategic initiatives. The report anticipates a significant EBITDA uplift, driven primarily by the NuStar acquisition, which will be partially reflected in this quarter's results. Citi expects 2Q24 EBITDA to reach $360 million, surpassing the Street mean of $343 million. This quarter will also benefit from stronger seasonal gasoline demand and a favorable margin environment, despite some noise from transaction costs.

Revised Price Target and Stock Rating

Citi Research maintains a "Buy" rating on SUN, with an updated price target of $65.00, reflecting a 14.6% expected share price return and a total expected return of 20.7% when including the 6.2% dividend yield. The revised price target is based on a 20-year NPV valuation, implying a 9.0x EV/EBITDA multiple on 2025 estimates. The investment thesis is underpinned by SUN's diversified cash flows, improved credit profile, and enhanced trading liquidity, all bolstered by recent M&A activities. As the report notes, "Excess cash flow generation from M&A transactions will also support SUN’s growth strategy across a broader suite of asset options."

Strategic Acquisitions and Seasonal Demand

The driving factors behind the new price target and stock rating include several key elements. Firstly, the NS acquisition is expected to be a primary driver of the sequential EBITDA uplift, despite only a partial quarter's contribution. Additionally, stronger seasonal gasoline demand and a favorable margin environment, characterized by lower but volatile gasoline prices, are expected to positively impact earnings. The European terminals acquisition and associated synergies are anticipated to more than offset transaction costs, contributing to the overall positive outlook. However, asset sales are expected to have an $11 million negative impact on EBITDA, and non-recurring make-up payments may create some noise in the reported earnings.

Citi has adjusted its 2024 EBITDA estimate down by 4% to account for one-time transaction costs flowing through reported EBITDA. The report also highlights potential macro influences, such as fluctuating gasoline prices and seasonal demand variations, which could impact SUN's financial performance. As the analyst notes, "We expect a portion of the $100 million of transaction costs to be included in reported EBITDA, which may create noise on earnings day."

Diversified Cash Flows and Synergy Realization

SUN's diversified cash flows and enhanced credit profile are central to Citi's positive outlook. The company's recent M&A activities have opened up a wider array of investment options, supporting its growth strategy. The NS acquisition, in particular, has led to an increase in synergy guidance through 2026. SUN's ability to generate excess cash flow from these transactions is expected to support further growth across a broader suite of asset options. The report also mentions the potential for a joint venture involving acquired crude assets, which could further enhance SUN's strategic positioning.

Valuation Recap and Outlook

Citi's $65 target price for SUN is derived through a 20-year NPV valuation, assuming an 11% discount rate and a 12% cap rate. This valuation implies a 9.0x EV/EBITDA multiple on 2025 estimates, reflecting the company's strong growth prospects and diversified cash flow streams. Key financial metrics include an expected 2024 EPS of $4.13, down from a previous estimate of $4.61, and a 2025 EPS of $5.78, slightly lower than the previous estimate of $5.88. The report also highlights potential risks to the valuation, including declining refined product demand, lower margins, lack of growth opportunities, and the potential for a dilutive general partner transaction.

Despite these risks, Citi remains optimistic about SUN's long-term growth potential, driven by strategic acquisitions and a favorable market environment. The analyst concludes, "At current trading levels, we see asymmetric risk/reward upside."