Pet Valu Holdings Ltd.
Teacher's pets: Q4 strong and better than expected,
2022 guidance at/above prior forecast, PT to $42
Our view: Q4/F21 results were strong and higher than forecast/guidance and supportive of the company’s premium valuation. 2022 outlook is modestly above forecast going into the quarter, consistent with strong long- term growth opportunity outlined at IPO. Dividend increase from inaugural post-IPO dividend $0.01 to $0.06/share quarterly implies 24% payout and close to 1% yield and is indicative, in our view, of management’s confidence in the sustainability of FCF and intention to return capital to shareholders. Reiterating Outperform rating, target to $42 (+$2).
Key points:
High quality Q4 results underpinned by stronger-than-expected top line growth and SG&A leverage. With consumables representing about 70% of spend and with annual toys/play purchases, annual or bi-annual updates on bed, crates and related items, and average pet lifespan of 8-12 years, the industry is in the very early innings of a long tail of organic growth as it services the 3 MM new pets adopted during the pandemic, 80% of which are under two years of age. As well, the digital channel remains a significant opportunity for PET, with penetration only ~1% in 2021 and omnichannel capabilities accelerating.
Long-term aspiration of 1,200+ stores achievable, in our view. PET is currently filling runway to 2023/24, with management confirming white space in both existing and new markets, and modest bias to the upside in the Province of Quebec. Prior to the acquisition of Chico, management had identified the potential for approximately 200 stores in the province, but the acquisition is providing insight into potential markets that were previously excluded.
Nudging up forecasts to reflect strong momentum early Q1 and 2022 guidance. F22E guidance $187-194 MM EBITDA and $1.37-$1.44 EPS a tick above our forecasts/consensus going into the quarter. Strong Q4 results and constructive tone on the conference call should drive modest upward revision to Street estimates, in our view. Incorporating Chico, tweaking the cadence of earnings progression to reflect higher freight rates, easier comps in Q1, and normalizing growth as the pandemic eases, drives our 2022E EBITDA to $195 MM and EPS $1.41. Although rising wage and supply chain costs to remain key themes through 2022, the combination of strong pet adoption rates, market share gains, network growth, fixed cost scaling, franchise structure leverage, and efficiencies should more than offset headwinds.
Reiterating OP rating underpinned by sustainable growth, FCF generation, and high-return franchise model. PT to $42 (+$2). Incorporating today's 8% share price increase, PET trading at EV/EBITDA-growth 1.6x, roughly in line with peers (Exhibit 6). Franchise store penetration forecast to rise from 64% in Q4 (67% including Chico) to 71% at the end of F23, which should drive accelerating FCF conversion and ROIC in the high 30% range, at the high end of the range in our universe of coverage with DOL 23.0% in and ATZ 19.5% in C22E.