Matching Targets Premium Brands Holdings Corp.’s recent $150-million convertible debt issuance is “indicative of telegraphing [of its] intention of pursuing future acquisitions,” said National Bank Financial analyst Vishal Shreedhar after coming off research restriction following the close of the deal.
“Recall last quarter that PBH highlighted a robust acquisition pipeline,” he said. “Specifically, management noted 18 files in advanced/active-stage discussions, representing $1,685-million in sales, as of May 2022. The convertible issuance reduces senior funded debt to adjusted EBITDA to 2.6 times from 3.0 times at the end of Q1/22 (this metric excludes convertible debt). Total funded debt is unchanged at 3.8 times (includes convertible debt).
“As an exploratory exercise, we calculate accretion potential of a deal in the $450-$600-million range (EV). Based on a range of parameters (EV/EBITDA of 6.5 times to 8.5 times, equity ranging from 0 per cent to 22 per cent of target EV, synergies at 10 per cent of acquired EBITDA), we estimate EPS accretion of 10-13 per cent. Our analysis assumes a 4.0-times threshold on total funded debt to EBITDA (at the high end of management’s long-term targeted range of 3.5 to 4.0 times).”
Mr. Shreedhar maintained his earnings before interest, taxes, depreciation and amortization estimates with the deal. However, he cut his 2022 and 2023 earnings per share estimates to $5.68 and $6.96, respectively, from $5.75 and $7.07 to reflect higher interest expenses.
He kept an “outperform” rating and $137 target for Premium Brands shares. The current average on the Street is $136.38.
“PBH’s 19-per-cent EV/EBITDA discount to the 5-year average represents the largest discount in our staples coverage (average discount is 4 per cent),” said Mr. Shreedhar. “Macro-economic uncertainty remains the key risk for investors.”
Elsewhere, Scotia Capital’s George Doumet cut his target to $137 from $145 with a “sector outperform” rating.
“PBH shares are down almost 26 per cent year-to-date on inflationary (stubbornly high input costs) and recessionary (demand destruction and trade-down) concerns,” he said. “We would take advantage of this weakness. Looking ahead, apart from M&A, we continue to look for share price upside from the recovery in PBH’s trading multiple as volumes remain healthy and margins normalize and eventually expand (once PBH holds price and input costs deflate).”