Premium Brands Holding Corp.
(PBH-T) C$100.00
Still Tough Environment, but Showing Signs of Stabilization Event
We are adjusting our forecasts, mostly to reflect the Q2/22 beat, but offset by a more conservative assumption of margin recovery in H2/22. The net impact is an ~2% decrease in our 2022 EBITDA estimate. Our 2023 and 2024 estimates are largely unchanged, although the lower EPS estimates reflect higher interest expense. Our $150.00 target price and BUY recommendation are unchanged.
Impact: NEUTRAL
Although the tug of war between company fundamentals and macro pressure continues, with the latter winning for now, we remain constructive on PBH's shares given the positive long-term growth outlook. Absent cost inflation across a variety of production inputs, PBH still has, in our view, best-in-class organic sales growth, driven by new sales initiatives and capacity investments. This is further complemented by a large pipeline of potential strategic acquisitions.
Despite the company's relatively demand-inelastic product offerings, inflation is beginning to bite, albeit on higher-priced impulse products such as beef jerky. The good news, however, is two-fold: 1) Demand destruction has been limited to a few categories: even after almost $500mm in pricing pass-through, demand remains robust, highlighted by stronger sales trends through the first third of Q3/22, and 2) Inflationary pressures, although elevated, appear to be stabilizing.
Consequently, we are still forecasting a stronger second-half EBITDA growth, driven by 1) PBH successfully leveraging new capacity to win more contracts, given the tight labour market faced by QSR/retail customers; 2) new program launches across its portfolio and expansions in the U.S.; 3) production efficiencies from higher volume, facility expansions, and increased automation; 4) ~$110mm in planned inventory reductions; 5) price increase catch-up; and 6) potential acquisitions.
On balance, we are forecasting H2/22 EBITDA growth of 20% versus 16% in H1/22.
TD Investment Conclusion
PBH's shares are down almost 27% from their November highs, driven down — like many of its peers — by concerns surrounding supply chain, inflation, and labour availability. Consequently, valuation has fallen well below its two-year average of 14.1x consensus forward EBITDA to 11.7x. We see an attractive opportunity to buy a solid Canadian company, highlighted by, in our view, one of the best long-term organic revenue growth and M&A profiles among its North American CPG peers.