CANADA BEST IDEAS: PBH LOOKS TO BE ON THE CUSP OF SIGNIFICANT OUTPERFORMANCE
THE TD COWEN INSIGHT
PBH shares are trading at a near decade-low valuation. However, with new capacity, onboarding of new customers and contracts, and the lapping of substantial multiyear capex, we believe that PBH is on the cusp of meaningful U.S. sales contribution and margin expansion. We estimate that a hypothetical sale of the Distribution Group implies a share price of ~C$170 by YE2025.
Summary Of Our Thesis
Given the increasingly stable operating environment, we see PBH on the cusp of more materially benefiting from its multiyear investment cycle (in capacity/automation/ innovation). In particular, Specialty Foods is poised to grow with: 1) fewer capacity constraints; 2) large product launches (in sandwiches and protein) with major foodservice/ QSR customers; and 3) innovation. Consequently, management continues to expect to hit its 10% margin target at some point in 2025 and two years earlier than its original guidance. Longer term, we also see potential value creation events that could further add significantly to the share price (note).
What Is Underappreciated Or Misunderstood?
Investor concerns are centered around PBH's relatively high leverage and low FCF in recent years, both of which are primarily attributable to an historic capital investment cycle (i.e., C $700mm over the past 2.5 years), albeit nearing the end. As PBH laps the substantial capex and once plant efficiencies and strong contribution margins from new capacity (i.e., 20-40% + for sandwiches/proteins/bakery) kick in, we see margins and FCF improving meaningfully, in turn pushing leverage below 3.0x by Q4/25.
Catalysts & Milestones To Watch
Short term, it comes down to execution (i.e., Q3 and Q4 results). Longer term, we see two potential opportunities that could add significantly to the share price: 1) accelerated margin expansion (management expressed confidence in reaching 11-12% consolidated margin by 2027-28), and 2) potential sale of the Distribution Group.
Price Target & How We Value The Stock
Our C$129 target price is based on an 11–12x EV/EBITDA multiple applied to our EBITDA estimates for the 12 months ending June 2026, a premium to PBH's current trading multiples, reflecting the improved operating environment and new capacity supporting strong U.S. demand growth.
What Is The Bear Case & The Risks To Our Call?
Further deterioration in macro conditions could pressure consumer demand for PBH's premium proteins/seafood. Also, potential delays in onboarding new customers (complex contracts) could temporarily impair growth and margin expansion.