Industrial AllianceJanuary 28, 2019
Industrial Alliance initiates with BUY and $95 price target. Premium Brands Holdings Corp.’s (PBH-T) “robust” balance sheet and free cash flow generation supports dividend increases “without sacrifice,” according to Industrial Alliance Securities analyst Neil Linsdell, who sees future M&A activity complimenting organic growth.
He initiated coverage of the Richmond, B.C.-based specialty food manufacturing and distribution company with a “buy” rating.
“PBH has invested heavily in production capacity, namely by implementing a number of initiatives (including accelerated investments in automation and robotics) that are producing operational efficiencies that will result in future margin expansion,” said Mr. Linsdell in a research report released Monday. “Given recent capacity expansion projects, we expect a greater focus on profitability to result in a higher ROIC [return on invested capital] (improving to 10 per cent by 2024).
“Acquisition activity has been accelerating as PBH continues to see a robust pipeline of opportunities, with $740-million worth of deals in 2018, driving our estimate of total revenue growth of 37 per cent into 2018 and 21 per cent in 2019, with adjusted EBITDA growth rates of 35 per cent and 25 per cent, respectfully. Management is very selective in its acquisitions and targets an IRR of at least 15 per cent unlevered and after-tax over a 10-year horizon. We believe that PBH’s strong balance sheet (with $238-million of available credit capacity) can support a continuation of its aggressive acquisition strategy.”
Though he called its sandwich production a “significant driver” going forward, remaining its single largest product category and bolstered by a recent US$29-million investment in a new Arizona plant, Mr. Linsdell sees growth opportunities in its seafood segment south of the border.
“The Ready Seafood acquisition (Sept. 2018) supports PBH’s agenda to expand its rapidly growing seafood segment, as well as leverage the strengths of Ready’s management team to accelerate the platform’s U.S. strategy,” he said. “Post-acquisition, seafood sales will have a run rate of $400-million with Ready contributing US$129-million, making this segment the second largest product category at PBH and the largest within the Premium Food Distribution segment.”
Mr. Linsdell thinks Premium Brands should be able to deliver “some tasty returns” for investors seeking both long-term capital and dividend hikes as it continues to execute on its growth strategy. He set a price target of $95 per share, which exceeds the current average on the Street of $93.25.
“Since 2015, the payout ratio (dividend/FCF) has been below 50 per cent, even with PBH announcing annual dividend increases,” he said. “In March 2018, the company increased its quarterly dividend by 13% to $0.475 per share per quarter ($1.90 per share annually). Going forward, we are forecasting annual dividend increases of 10 per cent due to strong FCF growth, while maintaining a payout ratio (to FCF) of less than 40 per cent. PBH’s 2.4-per-cent dividend yield is relatively in line with the specialty foods peer group median of 2.3 per cent, and the food distribution comps of 2.1 per cent. Finally, given recent acquisitions and capacity expansion projects, we expect a greater focus on profitability to result in a higher ROIC (improving from 6 per cent in 2018 to 10 per cent by 2024).”