Premium Brands Holdings Corp
Making strides but a cautious approach still warranted
Our View: Premium Brands Q2 results were broadly in-line with the Street and, like Q1, reflected continued progress with respect to delivery of improving margin performance. At the same time, the backdrop remains somewhat cloudy given a stretched consumer—particularly in Canada, which along with certain product launch delays increases the likelihood that 2024 financial performance comes in towards the low-end of the guided range. Maintain Sector Perform; price target -$1 to $100.
Key points:
• Q2 results largely met Street forecasts. Consolidated sales of $1,703 million were in-line with the Street, but 2% below RBC, while Adjusted EBITDA of $164.6 million was 1% above consensus (+3% vs. RBC). Adjusted EPS of $1.28 was broadly in-line with RBC/Street. Once again, results reflected continued improvements in Adj. EBITDA margins, with Specialty Foods +40 bps YoY to 10.5% (RBCe 10.1%), while Premium Food distribution was +88 bps to 7.4% (RBCe 6.4%).
• 2024 guidance maintained but increasing likelihood it comes in toward low-end of range. PBH’s 2024 guidance remains unchanged and calls for revenue of $6.65-$6.85 billion (+6% to +9% YoY) and Adjusted EBITDA of $630-$650 million (implied margin of 9.5%). That said, owing to several major product launch delays into late 2024 and early 2025 (key driver being customer onboarding timelines) as well as weaker than expected consumer trends in the foodservice channel, PBH flagged an increasing probability of ending the year toward the lower-end of both of the guided ranges. Importantly, management highlighted that overall visibility with respect to these customer onboardings are strong, with the delays owing more to timing (i.e Q4 vs. Q3 or potentially into early 2025). Our 2024 Adj. EBITDA outlook of $632.9 (vs. $633.5 previously) continues to sit at the low-end of guidance.
• Balance sheet leverage. Q2/24 total net debt/EBITDA was just over 4x vs. the company's target range of 3.5x-4.0x. Amid a valuation environment it quantifies as ‘very rational’, PBH continues to assess M&A opportunities with 3 deals (annual sales of $154 million) in advanced stages of due diligence. Funding wise, the company stressed that any deal will not stretch the balance sheet beyond current levels, and also highlighted alternative structures such as contingent consideration as potential funding mechanisms. Not to be overlooked about $400 million in net proceeds from 3 sale-leaseback transactions (two in the U.S. one in Canada) are also being contemplated, with PBH hopeful it can execute on one deal later in 2024, with the remainder in 2025.
• Relative valuation. Premium Brands currently trades at 9.6x our 2024 EBITDA outlook, which sits below the company’s trailing 5-year average trading multiple of 12.5. In our view, the discount reflects current macro uncertainty, along with balance sheet leverage which sits at the top end of the company’s targeted range.