Eight Capital Eight Capital analyst Ty Collin thinks a recent decline in Pet Valu Holdings Ltd.’s share price presents “an opportunity for investors to buy into this long-term profitable growth story with valuation upside.”
He initiating coverage of the Markham, Ont.-based company with a “buy” rating on Tuesday, touting both its expansion opportunities and room to grow within its existing footprint.
“PET reminds us of Dollarama coming out of its IPO, with plans to grow its store footprint by 60 per cent (approximately 5 per cent per annum and significant whitespace to do so,” said Mr. Collin. “The Company is focusing on rural markets, which it is uniquely positioned to serve, and can leverage its strong franchise model to grow rapidly with minimal capital investment.
“The Canadian pet industry has grown at a long-term CAGR [compound annual growth rate] of 6 per cent and is expected to grow at 5-7 per cent through 2027, with long-term tailwinds that should continue to drive strong same-store sales growth. Other internal initiatives, including an ongoing supply chain transformation and higher private label penetration, could potentially add $30-million-plus of EBITDA over the medium term. All told, we believe PET can sustainably deliver low-double-digit EPS growth.”
Seeing “insulated” from online competitors, Mr. Collin thinks Pet Valu’s “attractive economics justify a premium valuation.”
“PET currently trades like a retailer but deserves to trade like a franchisor, which commands a 3-7 times EBITDA multiple premium,” he said. “We believe the Company is misclassified among retailers due to its core of corporate-owned stores, but we expect that it will potentially re-rate as the store mix skews towards franchises over time. Franchise stores have helped drive high and stable profitability, with exceptional returns on capital as PET grows using franchisee capital and collects royalty fees with minimal cost exposure. A recession-resistant industry, and PET’s focus on consumable/nondiscretionary products, further de-risk the business and justify a valuation premium.”
He set a target of $47 per share. The average on the Street is $44.14.