Ladenburg Thalmann Initiates Spire With A Neutral Rating, $69 Target

St. Louis, Missouri-based Spire is a public holding company that provides natural gas and related services to areas of Missouri and Alabama.

Among the positive fundamentals, the brokerage highlighted the company's annual NEE growth of 4–6 percent, constructive regulatory programs in Missouri, a favorable rate construct in Alabama and potential upside from the merger with Alagasco.

On the flip side, Ladenburg is concerned with modest organic customer growth in the company's largest service territories, below-average Missouri authorized ROE, equity units with mandatory conversion and related dilution in mid-2017 and acquisition risks.

Meanwhile, the Spire's pending acquisition of Mobile Gas and Willmut Gas will add 104,000 customers in Alabama and Mississippi, respectively. Despite acknowledging the strategic logic for the acquisition, Ladenburg noted the relatively high multiples to EPS and EBITDA implied by the acquisition price.

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"We forecast 2016E EBITDA and EPS of $439.3 million and $3.42, respectively. Drivers include: ISRS revenues, Alagasco annual true-up, cost controls, merger synergies, and less than 1 percent customer growth," analyst Brian Russo wrote in a note.

Spire offers a dividend yield of 2.9 percent compared to the peer average of 2.7 percent, with average dividend growth of 4–6 percent. The company's current payout ratio is 57.3 percent compared to the peer average of 64.8 percent.

Shares of Spire currently trade at a 2018 leading P/E of 18.29x Russo's EPS estimate of $3.67, a 8.3 percent discount to a selected regulated natural gas LDC per group average of 19.95x.

Spire shares closed Thursday's regular trading at $67.15.

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