K-Bro Linen Inc T.KBL

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SMID CAP CANADIAN CONSUMER/SPECIAL SITUATIONS: Q2/24 DEBRIEF

THE TD COWEN INSIGHT

KBL, PRMW and SIS delivered much higher-than-expected results, meanwhile DII.B and MTY fell well short. Price returns post-reporting have been muted (except CGX +19%) although there has been some modest profit taking on the outperformers YTD and flows into some of the laggards. Amongst the biggest changes to our pecking order, CGX moves to #2 (from #6), with PBH now occupying the top spot.

Three key themes within our coverage that emerged from Q2 were:

• Not all consumer stocks faced challenged consumers. Consumer spending on health and wellness (incl. healthy hydration) and affordable entertainment stayed resilient. Specifically, 1) JWEL reported MSD Canadian POS sales growth, 2) PRMW's water exchange segment (arguably the most economic sensitive division) was up 10%, 3) SIS reported 15% Accessibility growth and 4) CGX's box office reached 90%/94% of 2019 levels in June/July. Meanwhile, we saw a pullback in out-of-home dining (MTY SSSG -2.1%, PZA SSSG -3.2%) and PBH highlighted weakness in foodservice and demand for premium beef and seafood.

• Companies with market expansion opportunities are well positioned. Specifically: 1) PBH's rapid expansion in the U.S. (organic volume +12.9%) more than offset the consumer weakness in Canada, and 2) JWEL's and PRMW's active pursuit of U.S and China (JWEL only) expansion and distribution gains drove HSD% and MSD% top line growth, respectively.

• Some laggard SMID-cap stocks have begun to outperform. Some quality names that have struggled YTD have started to outperform including BYD (+7%) and CGX (+19%). Meanwhile, investors appear to have taken some profits/stand still on this year's winners following Q2 including JWEL (-3%) and PRMW (flat) with the latter facing temporary uncertainty tied to its impending merger with BlueTriton.

  Stocks with the greatest near-term upside potential and/or momentum: Many within our SMID-cap coverage still trade well below historical average valuations given the macro environment and preference for large caps. However, we see several stocks poised to outperform in the near-term:

• CGX: With the NCIB announcement and strong film slate staring in 2H/24, we think the current stock price provides compelling upside.

• PBH: With valuation at a near decade-low, we see PBH shares on the cusp of significant outperformance as its historic capacity investments drive meaningful growth. We also see potential value creation events (note).

  Pecking order (linked to notes): 1) PBH, 2) CGX, 3) JWEL, 4) PRMW, 5) BYD, 6) SIS, 7) KBL, 8) DII, 9) GDI, 10) PZA, 11) MTY.