Premium Brands Holdings Corp T.PBH.DB.G

TD

[retiredcf]

Have a $160 target. GLTA

Premium Brands Holding Corp.

(PBH-T) C$107.00

Some Lingering Margin Pressure, but Really Strong M&A Pipeline Event

PBH will report Q1/22 results on May 6. We forecast EBITDA of $92.9mm vs. $82.5mm last year. Consensus is $96.1mm (range: $92.9mm-$102.0mm). We have reduced our Q1/22 estimate to reflect ongoing inflationary pressure before new product introductions, efficiencies, and pricing are expected to deliver substantially better earnings in H2/22. Our annual estimates are unchanged.

PBH has been announcing M&As concurrent with quarterly results. Although the timing is not predictable, we would highlight that Undercurrent News (UN), a global seafood news source, reported in late-February (updated in mid-March) that PBH is in exclusive negotiations to acquire Champlain's C&E Seafood Co., a large private Canadian seafood processor. We believe a deal could be announced with Q1/22 results.

Impact: POTENTIALLY POSITIVE

A large seafood deal would not be surprising as PBH has said that its M&A pipeline includes three active seafood files with ~$1 billion in revenues. UN estimates C&E revenue/EBITDA of $800mm/$70mm and a price tag of $450mm-$500mm (6x-7x EBITDA vs 9x-10x paid for the last four seafood acquisitions). PBH's seafood acquisitions have generally garnered less investor enthusiasm than its other platforms, which we believe is due to lower margins and higher earnings variability. However, if a deal were to close, we would likely view it favourably, given:

1. Accretion: Our initial estimate (based on UN reporting) is that it would likely be 13% accretive to EBITDA (i.e. 5-7% accretive to EPS because of higher interest expense) and could add ~$9-$14 (8-13%) to our target price;

2. Synergies and scale: C&E would make PBH one of the biggest lobster processors globally and although PBH does not typically target synergies, we would expect some in the way of plant efficiencies, distribution, and sales;

3. Attractive long-term industry supply and demand outlook.

TD Investment Conclusion

Macro pressure and concerns around returns on recent capacity investments, which we expect will drive strong top-line growth this year, have pushed valuation well below its two-year average of ~14x. We view this as an attractive opportunity to buy a solid company highlighted by one of the best long-term organic revenue growth and M&A profiles among its North American CPG peers.