CIBC commentsJAMIESON WELLNESS INC.
Inflation Haven: Set-and-forget Status Deserves Premium Valuation
Our Conclusion In times of turbulence across equity markets, we view JWEL as an ideal place for investors to capture predictable earnings growth. The business continues to prove it can withstand heightened cost inflation, while its brand power has international appeal. Domestic industry growth should moderate, but we expect JWEL can take share. This is a management team that has proven its ability to not only operate but also accurately forecast in a challenging environment. Such reliability is uncommon, even within the consumer staples space.
We maintain our $42 price target; Jamieson is rated Outperformer and is a favoured name among our small-cap universe.
Key Points
Category Growth Should Normalize, But We See Little Risk Of Decline. Though the vitamins category should see more traditional growth (low-tomid-single digit) in 2022 and 2023, we believe this is sufficient for Jamieson to hit its guide of 4%-7% growth in Canada. JWEL should be able to take share, partly from category extensions and also additional distribution points. Margin Expansion Demonstrates Prudent Management And Limited Inflation Risk. Jamieson Brands’ GM% expanded 189 bps Y/Y in the quarter, once again exhibiting JWEL’s ability to manage costs and pass on pricing. Another price increase is set for H2/2022; even if inflation continues to rise, we see little risk of margin contraction. China Remains A Black Box, But A Clear Growth Source. JWEL listed China as a primary source of international growth that reached 12% in Q1. It is the company’s most important international market, but has low visibility. Some investors have questioned the longevity of Chinese consumers’ affinity for Canadian brands. We do not yet view this as a risk, and we expect the country to remain the largest source of international growth for some time. The announcement on the Chinese distribution system awaits later this year. Cash Flow Conversion Should Improve In 2022 & 2023. FCF conversion has averaged just 23% of EBITDA from 2019 through 2021. But the ongoing drag on working capital should moderate in 2022, and then should improve further next year. We forecast conversion of 45% this year and 52% next year, potentially increasing the probability of larger dividend increases.
Q1 In Review. Revenue, EBITDA and EPS were slightly above consensus, as domestic growth and a stronger GM% offset higher SG&A spending than forecast. Total sales of $104MM slightly exceeded consensus of $102MM. Gross margin of 36.5% was ~90bps above our forecast, while EBITDA of $21MM was $1MM above consensus. Lower D&A and finance expense meant EPS of $0.26 exceeded consensus of $0.23. Full-year guidance was maintained at 5%-9% sales growth, and EBITDA/EPS growth of 8%-12%
Investment Thesis Jamieson has performed incredibly well throughout the pandemic, and the company has sustained its growth off a higher baseline. It is poised to deliver double-digit annual earnings growth, off high-single digit revenue growth. Domestic market share gains in 2020 appear not only sticky, but likely to build, and we expect above-category growth in Canada over time. International is becoming a consistent 20%+ annual growth channel, which adds another ~3 points to the top line. Ecommerce should also continue well above-average growth from 2020, while JWEL's online sales are margin-neutral, unlike most other consumer names. Layering on modest margin leverage, we view JWEL as a strong earnings compounder, with excellent stability and limited downside, justifying its premium multiple.
Price Target
(Base Case): C$42.00 We apply a 27x P/E multiple to the average of our 2022E and 2023E EPS to generate our $42 price target. This multiple is above JWEL's historical average of ~24x, but we believe international growth prospects have accelerated, and become more material than the past; furthermore, multiple potential catalysts exist (M&A and change in Chinese distribution model).
Upside Scenario: C$45.00 In this scenario we assume 2022E & 2023E EPS outperform by 4% and increase our target multiple by one turn.
Downside Scenario: C$27.00 In this scenario we assume 2022 and 2023 EPS grow below the low end of historical rates resulting in a 15% decline to each figure, and w