National Bank National Bank Financial analyst Vishal Shreedhar thinks the takeout price of Sleep Country Canada Holdings Inc.’s friendly takeover agreement with a subsidiary of Fairfax Financial Holdings Ltd. is “reasonable” and reflects the retailer’s “strong market share, solid returns on capital albeit cyclical, and ongoing market uncertainty.”
In response to Monday’s announcement, he moved his recommendation for its shares to “tender” from “sector perform” and his target to $35 to reflect the offer price from $30. The average on the Street is currently $24.60.
“Given the healthy premium, we do not anticipate a superior bid to be likely,” he said.
“ZZZ is a strong operator in mattress retailing, with a solid balance sheet (we model Q4/24 net debt to EBITDA of 2.2 times) and a leading market share of 40 per cent, We believe the acquisition of ZZZ reflects Fairfax’s willingness to look through uncertainty associated with the backdrop.”
Mr. Shreedhar also previewed the company’s approaching second-quarter financial report, projecting earnings per share of 42 cents, which matches last year’s results and exceeds the consensus expectation on the Street by 5 cents.
“We expect Q2/24 EPS to be flattish year-over-year, reflecting higher SG&A expenditure (logistics, advertising, telco/IT, wages, D&A, etc.) and higher interest expense, offset by positive same store sales growth, higher gross margin, new store openings in the last 12 months, contribution from Casper acquisition (closed in April 2023) and share repurchases in the last 12 months,” he said.
“Our review of industry indicators suggests that the operating environment is sequentially improving, albeit with volatile trends. Specifically, (i) Mattress manufacturing sales declined 6 per cent in Q2/24 (data until May 2024); a sequential improvement from a decline of 21 per cent year-over-year in Q1/24, (ii) Following 3 quarters of positive year-over-year growth, residential unit sales (CREA data) declined 4 per cent year-over-year in Q2/24, and (iii) The consumer confidence index improved to 66.0 in June 2024, rebounding from a 2024 low of 59.3 in April 2024.
”Our review of U.S. peer commentary points to the following themes: (i) Near-term industry performance is expected to be soft (although ZZZ typically outperforms the industry in Canada), (ii) An increase in the average selling price (mix shift as higher-priced units performed better than the lower-priced units), and (iii) Stable commodity prices.”
Elsewhere, others making changes include:
* RBC’s Tom Callaghan to $35 from $30 with a “sector perform” rating.