Premium Brands Holdings Corp T.PBH.DB.G

TD Raises Target

[retiredcf]

SLOWLY GATHERING STEAM, LOW VALUATION AN OPPORTUNITY TO TAKE PART IN THE UPSIDE

THE TD COWEN INSIGHT

Our short- and long-term outlooks are both unchanged. Moreover, with recently deployed new capacity, ongoing onboarding of new customers and contracts, stable operating environment, and lapping of substantial multi-year capex, we are increasingly optimistic on the meaningful U.S. sales contribution and consequently margin expansions starting H2/24.

Impact: NEUTRAL

There still appears to be some reluctance among investors when it comes to PBH. Yesterday, a few expressed disappointment around management's more cautionary guidance which pointed to an increased probability of hitting the lower end of their target ranges. While some of that is tied to broader economic challenges which are not within management's control, the bigger component is tied to start-up delays and longer on- boarding timelines. Keep in mind that these are large (and complex) projects with a number of moving parts, and we would argue that delays should almost be expected. At the end of the day, with the long game in mind, we would rather them be a little late and successful than a quarter early and potentially fail. For the most part, they only get one shot at it

and future business depends on the execution. That said, we would argue that the almost 13% organic volume growth in U.S. Specialty Foods in Q2 (~12% in Q1) is a sign that management is adept at managing these large product launches.

Overall, we see the increasingly stable operating environment starting to allow the benefits from an extended investment cycle (in capacity/automation/innovation) to emerge more meaningfully. In particular, Specialty Foods is poised to grow with: 1) fewer capacity constraints; 2) large product launches (in sandwiches and protein) with major foodservice/ QSR customers; and 3) innovation. Consequently, management continues to expect to hit its 10% margin target at some point in 2025 (i.e., two years earlier than its original guidance). Although we may be more conservative than management (i.e., assuming ~9% sales CAGR, versus 12.5% required to achieve its $9.5bln 2027 sales target), our estimates clearly signal that we do not believe PBH has spent this much on initiatives to generate only 5%/10% revenue growth/margins in the long term.

Following Q2 results and the conference call, we fine-tuned our model, resulting in no meaningful changes in our 2024-2025 estimates. Rolling out valuation another quarter, our target price increases to C$129 (from C$125).