Calling it “a highly compelling growth story supported by a robust pipeline of organic and M&A opportunities,” Desjardins Securities analyst Chris Li assumed coverage of Premium Brands Holdings Corp. (PBH-T) with a “buy” rating.
In a research report released Monday, he said the Richmond, B.C.-based specialty food manufacturer and distributor’s “strong” growth has been unvalued given concerns about high inflation and its impact on margins and demand. However, he thinks they are “manageable.”
“Despite macro challenges, PBH is on track to exceed its five-year (2023) financial targets, implying attractive EBITDA and EPS CAGR [compound annual growth rate] (202123) of 20 per cent plus and 26 per cent plus, respectively,” said Mr. Li. “But the strong growth potential is being overshadowed by concerns around high inflation and the impact on margins and demand. Current valuation (12.2 times 2022 consensus EBITDA) is 10 per cent below the five-year average. We believe these headwinds are manageable and mostly transitory. We see attractive long-term upside, driven by both double-digit-percentage earnings growth and trading multiple expansion as macro conditions and margin visibility improve.”
“Our 2022 EBITDA margin of 9.0 per cent is in line with the midpoint of management’s guidance and up 30 basis points vs 2021. Our downside scenario assumes no margin improvement as PBH is unable to fully pass through the higher costs as macro headwinds (persistently high inflation, rising interest rates, war in Ukraine, etc) weigh on consumer confidence, causing demand to be more elastic vs previous market downturns. All else equal, we estimate that no margin improvement in 2022 would imply downside valuation of $96, which is not too far from the current share price (67-per-cent downside). As PBH is already trading at a depressed valuation, we do not assume further multiple contraction in our downside valuation.”
Touting its “solid” balance sheet and “strong” liquidity, Mr. Li set a target for Premium Brands shares of $150. The average is currently $144.30.