The EV-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is an important metric used in valuing MLPs. The EV-EBITDA ratio is neutral to the capital structure, as it takes into account a company’s debt and equity. A lower ratio may indicate a likely undervaluation.
Using the trailing 12-month EBITDA for calculation, the EV-EBITDA ratios for Ferrellgas Partners (FGP), AmeriGas Partners (APU), Suburban Propane Partners (SPH), and Star Gas Partners (AGU) are 16.1x, 10.5x, 8.8x, and 3.2x, respectively.
The graph above compares the EV-EBITDA ratios for four MLPs. The forward EV-EBITDA ratios based on the current fiscal year’s EBITDA estimates for APU, FGP, SPH, and SGU are 9.2x, 9.8x, 8.9x, and 4.1x, respectively. The lower forward ratios for AmeriGas Partners and Ferrellgas Partners indicate expectations of EBITDA growth for the two MLPs in the current fiscal year. The fiscal year end for APU is September 30, 2016. It’s July 31, 2016, for Ferrellgas Partners.
The higher forward ratio compared to the trailing ratio for Star Gas Partners likely indicates expectations of a decline in EBITDA for the last quarter of the company’s fiscal year, which ended September 30, 2015. This also explains its low current EV-EBITDA multiple.
Impact of general partner interests
The EV-EBITDA ratio can be misleading when you’re trying to understand the unit valuation of limited partners. This is because the entire EBITDA in the EV-EBITDA ratio calculation may not be available to limited partners. So it’s useful to make an adjustment to EBITDA to reflect the interests of limited partners.
AmeriGas Partners’ IDR (incentive distribution rights) structure allows its GP (general partner) to receive a greater percentage of total distribution with respect to the amount by which the distribution per unit to limited partners exceeds $0.61. APU’s latest quarterly distribution is $0.92. APU forms ~0.5% of the Guggenheim Mid-Cap Core ETF (CZA).
Distributions for Ferrellgas Partners have not yet reached the levels required to begin payment of IDRs. Suburban Propane Partners doesn’t have IDRs. Star Gas Partners currently operates under a 90%-10% distribution split. To learn more about incentive distribution rights, read The Importance of Incentive Distribution Rights for MLPs.