SHARES COULD BE WORTH C$170 BY END OF 2025 UNDER TWO HYPOTHETICAL SCENARIOS
THE TD COWEN INSIGHT
Despite the increasingly stable operating environment, growing success with its U.S. initiatives, and being on the cusp of significant margin expansion, PBH shares are trading at a decade-low valuation. Our analysis suggests that two value-creation opportunities — the hypothetical divestiture of the Distribution Group and accelerated margin expansion — could be meaningful to the share price.
Impact: POTENTIALLY POSITIVE
We take a closer look at two potential (and viable) opportunities that could add significantly to the share price. Specifically:
Potential divestiture of the Distribution Group. PBH has grown its distribution business significantly over time and as a result, we believe that it could be of significant strategic value to other industry players given its scale, national reach and differentiated product and service offerings (i.e., fresh and frozen protein and seafood, packaging, dry aging, specialized butchering, import service). Based on peer valuation and a recent transaction, we estimate that the Group could be worth C$800-900mm.
Accelerated margin expansion. Our current estimate of 10% consolidated EBITDA margin by 2026 appears increasingly conservative (management expects to reach 10% by 2025) considering the substantial contribution margins from PBH's fast-growing core products (i.e., 20-25% for sandwiches, ~30% for proteins, 40%+ for bakery) and plant efficiencies (>C$15mm in EBITDA in 1H/24). In our recent investor meeting, management expressed confidence in reaching 14%+ Specialty Foods / 11-12% consolidated margin by 2027-28, all else equal. This confirms our view that we do not believe PBH has spent C$700mm
in growth capex over the last 2.5 years on initiatives to generate only 5%/10% revenue growth/margins in the long term.
Substantial value creation. We estimate that a hypothetical sale of the Distribution Group (and assuming a re-rating of the remaining business) implies a share price of ~C $170 by YE2025 (compared to C$145 using current modeling assumptions). Accelerated margin expansion (i.e., assuming 10% margin by 2025) also implies a share price of C $170, and the two events combined implies a share price closer to C$190 by the end of 2025.
Also, we took a second look at our forecasts (PBH reported Q2 results on Aug. 8 — see our note here) and lowered our 2024 revenue/EBITDA estimate slightly (<1%) to the bottom end of management's guidance range, reflecting the timing of product launches. We also raised depreciation and interest assumptions, resulting in lower EPS estimates. Our C$129 target is unchanged.
SMID CAP CANADIAN CONSUMER/SPECIAL SITUATIONS: Q2/24 DEBRIEF
THE TD COWEN INSIGHT
KBL, PRMW and SIS delivered much higher-than-expected results, meanwhile DII.B and MTY fell well short. Price returns post-reporting have been muted (except CGX +19%) although there has been some modest profit taking on the outperformers YTD and flows into some of the laggards. Amongst the biggest changes to our pecking order, CGX moves to #2 (from #6), with PBH now occupying the top spot.
Three key themes within our coverage that emerged from Q2 were:
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Not all consumer stocks faced challenged consumers. Consumer spending on health and wellness (incl. healthy hydration) and affordable entertainment stayed resilient. Specifically, 1) JWEL reported MSD Canadian POS sales growth, 2) PRMW's water exchange segment (arguably the most economic sensitive division) was up 10%, 3) SIS reported 15% Accessibility growth and 4) CGX's box office reached 90%/94% of 2019 levels in June/July. Meanwhile, we saw a pullback in out-of-home dining (MTY SSSG -2.1%, PZA SSSG -3.2%) and PBH highlighted weakness in foodservice and demand for premium beef and seafood.
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Companies with market expansion opportunities are well positioned. Specifically: 1) PBH's rapid expansion in the U.S. (organic volume +12.9%) more than offset the consumer weakness in Canada, and 2) JWEL's and PRMW's active pursuit of U.S and China (JWEL only) expansion and distribution gains drove HSD% and MSD% top line growth, respectively.
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Some laggard SMID-cap stocks have begun to outperform. Some quality names that have struggled YTD have started to outperform including BYD (+7%) and CGX (+19%). Meanwhile, investors appear to have taken some profits/stand still on this year's winners following Q2 including JWEL (-3%) and PRMW (flat) with the latter facing temporary uncertainty tied to its impending merger with BlueTriton.
Stocks with the greatest near-term upside potential and/or momentum: Many within our SMID-cap coverage still trade well below historical average valuations given the macro environment and preference for large caps. However, we see several stocks poised to outperform in the near-term:
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CGX: With the NCIB announcement and strong film slate staring in 2H/24, we think the current stock price provides compelling upside.
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PBH: With valuation at a near decade-low, we see PBH shares on the cusp of significant outperformance as its historic capacity investments drive meaningful growth. We also see potential value creation events (note).
Pecking order (linked to notes): 1) PBH, 2) CGX, 3) JWEL, 4) PRMW, 5) BYD, 6) SIS, 7) KBL, 8) DII, 9) GDI, 10) PZA, 11) MTY.