More Analyst Reactions While the second-quarter results for Premium Brands Holdings Corp. (PBH-T) exceeded expectations, Stifel’s Martin Landry was one of several equity analyst on the Street to express concern about shrinking margins and debt levels given rising interest rates.
“PBH’s balance sheet reached its highest leverage ratio since 2015 with total debt/EBITDA of 4.4 times,” he said. “This increased financial leverage raises questions given that the company’s revolved bears variable rates. However, management appeared confident in its ability to manage debt levels going forward. Elevated inventory levels are expected to decrease in the second half driven by safety stock reduction and sell through off inventory build-up in H1/22. This should allow the company to generate significant cash flow and reduce its balance sheet leverage to more normalized levels, in our view. PBH’s still has room before breaching its debt covenants, which require a senior funded debt to EBITDA ratio less-than 4 times (vs 3.3 times currently).”
Shares of the Vancouver-based specialty food company fell 1.3 per cent on Friday following the premarket release of its better-than-anticipated quarterly results. Revenue rose 23.1 per cent year-over-year to $1.52-billion driven largely by price increases, exceeding Mr. Landry’s $1.46-billion estimate. Adjusted earnings per share gained 11.9 per cent to $1.37, above the $1.34 consensus on the Street but missing the analyst’s $1.53 estimate.
“Premium Brands increased its 2022 revenue guidance to $5.75-6-billion ($5.6 to $5.85-billion previously),” said Mr. Landry. “The guidance assumes full year organic volume of 5.5-6 per cent in the Specialty Food’s segment, which suggest an impressive growth of 8-9 per cent in H2. This looks aggressive at first glance especially in light of the economic slowdown. Adj. EBITDA guidance calls for margin improvement in H2/22 as price increases implemented in H1 offsets the inflationary pressures seen in the first half of the year. We could see upside to the Adj. EBITDA guidance under a scenario where commodity prices continue to decrease resulting in higher gross margin levels. Management currently assumes a stable commodity environment from current levels, which could be conservative.”
Despite the guidance bump, Mr. Landry lowered his 2022 and 2023 EPS estimates by 3 per cent and 5 per cent, respectively, citing of lower margins and higher interest expense associated with rising interest rates and PBH’s higher debt level.
“Year-to-date organic growth of 2 per cent has slowed vs historical levels, but the slowdown seem mostly related to company specific issues rather than demand destruction,” he said. “With price increases almost fully caught-up to commodity cost inflation management expect profitability levels to increase in coming quarters and next year calling for 2023 EBITDA margins to reach 10 per cent, up 200 basis points from YTD levels of 8.1 per cent.”
That led him to cut his target for Premium Brands shares to $120 from $135, reiterating a “buy” rating. The average on the Street is $132.30.
“At first glance this target seems aggressive but commodity costs stabilizing and potentially retreating would benefit the company,” he said. “Our visibility on commodity costs is limited reducing our conviction on the likelihood of this potential scenario. PBH’s financial leverage remains high, in our view, and could impact its valuation multiples. We maintain our BUY rating but decrease our target ... on the back of lower estimates and valuation multiples.”
Elsewhere, others making changes include:
* iA Capital Markets’ Neil Linsdell to $137 from $145 with a “buy” rating.
“Despite macro-based challenges, the Company has consistently delivered good year-over-year performance,” said Mr. Linsdell. “We see that customer demand remains strong and continues to grow, even after significant price increases ($490-million in LTM). The Company is diversified in protein types and sources, customers, and sales channels, positioning well in a challenging environment. With signs of commodity prices stabilizing and the labour market easing, the Company is likely to see margin improvements and higher organic volume growth as the operating environment normalizes in the next few quarters.”
* National Bank’s Vishal Shreedhar to $134 from $136 with an “outperform” rating.
“PBH has executed relatively well through the pandemic; however, total returns have lagged, down by 21 per cent year-to-date vs. the TSX Staples Index (up by 5 per cent),” he said. “We believe markets are looking for improved margin performance and improved organic growth. Management has suggested that cost inflation is moderating and labour conditions are improving, which we believe are favourable when looking out 12 months (all else equal).”
* Scotia’s George Doumet to $135 from $137 with a “sector outperform” rating.
“All things taking into account (supply chain and labour constraints, inflationary environment, etc), PBH delivered a good quarter. In terms of themes, it is similar to what we’ve been seeing in the last few quarters, notably a continued recovery in foodservice volumes met with a challenging operational backdrop at SF (constraining volume growth and margin expansion). On the 2022 guidance, adj. EBITDA is now expected to be at the low range of its $510-million to $530-million band (we and the Street were there already) due to negative mix impacts, stubbornly elevated raw material costs and higher freight costs. Looking ahead, we anticipate the share price recovery to gain traction when both volume growth and margins normalize (aided by PBH holding price as input costs eventually deflate). We expect (accretive) bolt-on M&A to drive earnings (albeit likely at a slower pace),” said Mr. Doumet.
* RBC’s Sabahat Khan to $112 from $125 with a “sector perform” rating.
“We remain cautious on the outlook, however, given ongoing macro headwinds (e.g., inflation/supply chain disruptions), as well as concern about the macro backdrop (i.e., potential for an economic slowdown), both of which could continue to impact results/demand over the coming quarters. The updated guidance also implies a lower margin relative to prior guidance (reflecting the operating backdrop and two new acquisitions),” said Mr. Khan.
* CIBC’s John Zamparo to $106 from $113 with a “neutral” rating.