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Pet Valu Holdings Ltd T.PET

Alternate Symbol(s):  PTVLF

Pet Valu Holdings Ltd. is a Canadian specialty retailer of pet food and pet-related supplies. The Company has over 800 corporate-owned or franchised locations across the country. Through its neighborhood stores and digital platform, the Company offers more than 9,000 competitively priced products, including an assortment of premium, super premium and holistic brands. Its family of stores consists of Pet Valu, Bosley’s by Pet Valu, Total Pet and Tisol Pet Nutrition & Supply. Its product categories include puppy essentials, dog food, dog treats, dog toys, dog collars, leashes & harnesses, dog carriers & travel, kitten essentials, cat food, cat litter & litter boxes, cat bowls & feeding, small pet food, treats & hay and aquariums, kits & tanks. Its brands include Performatrin Ultra, ACANA, Royal Canin, ORIJEN, Go! Solutions, Performatrin Prime, Hill's Science Diet, Big Country Raw, Open Farm and Stella & Chewy’s, Purina Proplan, Purina Pro Plan, and Weruva.


TSX:PET - Post by User

Post by retiredcfon May 03, 2022 8:24am
68 Views
Post# 34650390

RBC

RBCCurrent and upside scenario targets are $42 and $51. GLTA

Pet Valu Holdings Ltd.

Pick of the litter: Reiterating compelling SMID cap idea ahead of Q1 results

Our view: Forecasting EBITDA $42.1MM (+17% Y/Y) and EPS $0.29 (both unchanged) when PET reports Q1 results May 10. Estimates underpinned by strong pet adoption rates with scaling and franchise model contributing to GM expansion. We remain constructive on Pet Valu as a compelling SMID cap, defensive consumer retail idea underpinned by sector-leading organic growth outlook as surge in pet ownership in COVID should underpin long- term demand for products and services. Reiterating OP rating, $42 target.

Key points:

Forecasts unchanged ahead of Q1. Estimates include about five weeks contribution from the acquisition of Chico closed February 25, and assume SSS +14.5% that implies three-year SSS CAGR 11.9%. In our view, the combination of strong pet adoption rates, market share gains, network growth, fixed cost scaling, franchise structure leverage, and efficiencies should more than offset the effect of rising wage and supply chain costs.

Long tail of pet care demand even as adoption rates normalize. 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 filling the runway to 2023/24, with management confirming white space in existing and new markets, and bias to the upside in the Province of Quebec. Prior to the acquisition of Chico, management identified potential for approximately 200 stores in the province, but the acquisition is providing insight into potential markets that were previously excluded.

Organic growth story with strong industry dynamics, leading market position, and compelling hybrid business model. Based on our analysis, the Company’s hybrid corporate/franchised structure combines the best of both models. The robust network of owned and operated stores provides an effective platform to test new concepts and technologies at scale; the capital-light franchised structure provides recurring royalty and rent revenue augmented by wholesale merchandise sales that drive strong and sustainable free cash flow conversion and capital return metrics.

Reiterating OP rating underpinned by sustainable growth, FCF generation, high-return franchise model. PET trading at EV/EBITDA-growth 1.6x, roughly in line with peers (Ex. 4). Franchise store penetration forecast to rise from 64% in Q4 (67% including Chico) to 71% at end of F23, which should drive accelerating FCF conversion and ROIC in high 30% range, and high end of the range in our coverage.


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