Colabor, founded in 1962, is the largest Quebec-based distributor and wholesaler of food and related products. The company primarily serves the Quebec hotel, restaurant, and institutional (HRI) markets and has over 8,000 customers. Products (including 10,000 SKUs) are sourced through a network of 600+ suppliers consisting of both national and private label brands. Colabor’s goal is to continue gaining market share in Quebec, which is currently dominated by two larger international players, Sysco and Gordon Food Service, along with several smaller distributors.
Colabor’s management team brings a very strong background with foodservice and distribution. In particular, President and CEO Louis Frenette joined the company in 2019 and brings over 35 years of experience in the foodservice and CPG industry. He is the former President & CEO of Parmalat Canada, Bonduelle North America and Danone Canada. With Mr. Frenette joining as CEO, he has established an experienced team around with additional foodservice, operational, and financial experience. We believe there is a high probability this team will be successful in pursuing its near/mid-term goals of increasing market share and penetration in Quebec.
Looking forward, Colabor’s near-term growth initiatives will be heavily focused in Western Quebec, with its new distribution facility in Saint-Bruno. This new distribution center builds off an already well-established presence in Eastern Quebec where we estimate Colabor’s market share is approaching the 30% range. We see the primary growth drivers as follows:
- Western Quebec Expansion and Focus on Distribution Segment Growth — With the start and ramp of its newly-built $18 mln Saint-Bruno facility in Western Quebec, Colabor’s addressable market triples in size to just over $4 billion (or 90% of the $4.5 bln Quebec hotel, restaurant, and institutional market) versus $1.35 billion previously. Combined with a more aggressive launch of distribution activities, and logistics management, we see opportunity for market share gains coupled with margin improvement with customer acquisition focused on independent restaurants and small chains.
- Private Label Upside — the company currently offers 600 SKUs under private label with opportunity to significantly increase its offering which will have a benefit to gross margins. We believe current private label penetration is sub 10%, with peers indicated to be in the 35-40% range.
- Accelerating Free Cash Profile — With the large Saint-Bruno facility capital spending behind the company and lower near-term maintenance CAPEX spending ($1.5-2 mln in 2024), we expect increased free cash in 2024 and 2025 towards $18 mln per year.
- Strategic M&A — We see opportunity for additional targets within the Quebec market and potentially outside / adjacent to the province longer term. Under the leadership of Mr. Louis Frenette, Colabor has made some smaller acquisitions, but we would expect this to now accelerate with the Saint-Bruno capital investment complete. In the near-term, we believe the company will seek to acquire smaller regional distribution customers as a means to accelerate growth and market share. Our understanding is that there are also larger targets in the market, but such transactions would need to carry a favourable return profile for shareholders and investors.
In modeling out the revenue for GCL, we forecast total revenue on a segment basis between distribution revenue and wholesale revenue. From that perspective, while Colabor has started consolidating the revenue line from a reporting basis, we are under the impression it will continue to provide comments regarding underlying segment growth. As illustrated in Exhibit 12, with the ramping of the new Saint-Bruno facility, we expect that Distribution segment revenue growth will outpace wholesale over the medium-term.
We would note that we do expect Colabor’s growth strategy to take time — this is something we do believe investors should expect to see. The company operates in a competitive industry, and we do not want to see the company start using price as the primary means to gain market share. As history would demonstrate, such a strategy can be very risky and lead to suboptimal returns. Importantly, as recently disclosed by the company, there is a large contract that comes for renewal at the end of 2024 on an existing piece of business that the company has had for a number of years. We will monitor progress on this closely and would expect a high degree of competition on this bid process. Given the disclosure of this contract renewal, we believe it could represent over 10% of sales (note that GCL did disclose one customer in the Distribution segment accounted for 11.7% of the Company's sales in 2023).
In terms of our multiple selection, we use a forward multiple of 7.0x our F2026E EBITDA for the business, which is a multiple that we believe captures the phased approach the company is taking in the Quebec market. As mentioned, as we think about Quebec’s $4.5 bln HRI market and Colabor now reaching 90% of customers, we believe this will provide opportunity for sales and margin upside (with tailwinds coming from private label as well). Our valuation is presented in Exhibit 18. As illustrated, applying a 7.0x multiple to our F2026E EBITDA, this yields an implied valuation of $1.80 per share. This valuation is readily supported by a DCF which incorporates a 12.5% discount rate and 2.5% terminal growth estimate. All in all, we see upside in Colabor’s stock as the business grows and expands in the Quebec market, and we see it as attractively valued.