Pet Valu Holdings Ltd.
Don't keep a good dog down: valuation impact of transient headwinds overdone in our view
Our view: 2023 is off to a solid start with Pet Valu gaining share relative to industry MSD growth, augmented by MSD NTI rollout. Nonetheless, today’s share price decline is likely overreaction to diminished GM% visibility, with current valuation also reflecting accelerated capital project to strengthen and scale up distribution infrastructure. In our view, however, current valuation relative to the H2 setup provides an attractive entry point, with GM% backdrop improving as of Q3 as the company cycles FX headwinds. Reiterating constructive view, OP rating and $50 PT.
Key points:
Revised assumptions reflect transient GM% pressure in Q2, with notable improvement in H2 as the company cycles FX headwinds. Fundamentally, the business is strong. PET is gaining share against a healthy industry growing MSD and reinvesting capital to strengthen the distribution infrastructure. Reflecting Q1 results and rest of 2023 trends/outlook into our model results in 2023E EBITDA -2% to $231.4 MM and EPS $1.60, both conservative relative to guidance ranges $230-$237 MM and $1.60-$1.66/share respectively. 2023E reflects GM% 36.0% (previously: 35.8%) that excludes approximately 80 bps ($13 MM) of transient network transformation costs, with H1<H2 as the company cycles CAD deflation and related impact on COGS. Our 2024E EBITDA/EPS essentially unchanged at $264.7 MM (+14% Y/Y) and $1.95 (+22% Y/Y). In our view, current valuation implies market skepticism with respect to 2023 guidance. Achievement of implied earnings cadence in H2 likely a catalyst for the stock.
We reiterate our thesis that incorporates stable GM% in the range of 36.0%, underpinned by rising PL penetration, DC efficiencies, store occupancy leverage and rising franchise fees. Moreover, with good/ better/best positioning and growing mix of proprietary brands at attractive relative value, PET is well positioned for potential mix shift, in our view.
Favouring debt repayment over NCIB in 2023. In light of the exit rate on financing costs 6.93% (fully variable), focus for the rest of the year likely favours repayment of credit facility consistent with Q1, over the NCIB. Accordingly, our revised model defers share repurchases into 2024. Sensitivity to a 1% change in interest rates on closing balance of credit facility is $0.773 MM on a quarterly basis (2.5% of Q1 EBT).
Share price decline since the Q4 print seen as overreaction to transient headwinds and uncertainty around notable capital projects; $50 price target unchanged. PET continues to operate from a position of strength, with i) SSS outpacing MSD industry growth, augmented by ii) MSD NTI rollout, while enjoying the benefits of iii) an otherwise very capital-light business model. Current valuation presents an attractive entry point, with PET trading at ~12.3x 2023E EBITDA, well below the post-IPO average. On a relative basis, its trading multiple is below DOL, above ATZ (Ex. 11 and 12).