Pet Valu Holdings Ltd.
Playing fetch: Fine-tuning assumptions ahead of Q1 release, Reiterating constructive view
Our view: Forecasting Q1 EBITDA $53MM when Pet Valu reports Q1 on May 7. 2024 EBITDA forecast $251 MM at the mid-point of 2024 guidance range $248-$254 MM, a whisker below the average consensus of $252 MM. Outlook for PET remains solid, in our view, anchored by the stability of PET offering, heavily weighting toward consumables (~77%), and loyal customer base of devoted pet owners, offset modestly by value- seeking consumer behaviour and pressure on sales of discretionary items. Reiterating Outperform rating and $35 price target.
Key points:
PET's business remains fundamentally strong notwithstanding more cautious discretionary consumer spending. Reiterating our view that PET continues to be well positioned for mix shift with good/better/best positioning and growing mix of proprietary brands at attractive relative value. Fine-tuning F24-25 forecasts that reflect heightened value-seeking consumer behaviour, normalizing promotional mix, demand headwinds in more discretionary categories, shift to larger pack sizes, higher wholesale revenues, sustained FX headwinds, infrastructure investments and higher for longer interest rates, partly offset by sustained demand for premium nutrition, store and infrastructure occupancy leverage, rising franchise fees and efficiency gains. F24-25 forecasts essentially unchanged with forecast EBITDA moderated by ~0.5%-2.0%, with our estimates of IFRS GM % around 34.7%-34.8% broadly consistent with NT guidance “slightly below the Company's historical range of 35% to 36%”. Introducing F26 estimates, F23-26E EBITDA/EPS CAGR's ~9.5%, the latter moderated by incremental D&A associated with infrastructure investments.
Supply chain investments should drive solid MT performance: Estimating F26 IFRS GM% around 35.0%, at the lower end of the Company's historical range, representing sequential improvement as a result of capacity utilization and leverage from "infrastructure" investments in distribution centers in GTA (successfully opened in F23), Vancouver (expected transition date - Q3/F24) and Calgary (F25 - early F26). These projects should lay the foundation to support long-term network growth by doubling capacity, and arguably drive incremental profitability over time through better efficiency, automation and elimination of third-party logistics.
Capital allocation favouring reinvestment into the business and debt management. Consistent with management's view, favouring capex/debt repayment over NCIB in the NT. Looking ahead to accelerating FCF in F25, our model introduces share buybacks as of F25.
Reiterate OP rating, PT unchanged. Target multiple 11.0x in line with 24E EV/EBITDA ~11.0x and reflects an improved flow of funds. Current valuation presents an attractive entry point, with PET trading below the post-IPO average (Ex. 5).