Pet Valu Holdings Ltd T.PET

RBC Raise Target

[retiredcf]

Their upside scenario target is $54.00. GLTA

November 1, 2022
Pet Valu Holdings Ltd.

Best in breed: Reiterating PET as a top SMID-cap idea heading into the Q3 print

Our view: We reiterate our view of PET as a compelling, growth oriented, staple leaning, defensive SMID-cap idea in Canadian specialty retail. Performance and outlook supportive of the company’s premium valuation, and consistent with execution of strong long-term growth opportunity outlined at IPO. Reiterating OP rating, target to $45 on roll forward (+$2).

Key points:
No change to expectations ahead of Q3 results; Forecasting Q3 EBITDA/ EPS $52MM/$0.37, largely in-line with consensus $51.3MM/$0.37.

• SSS expectations for H2/22 in-line with H1 (relative to C19), at the high- end of guidance as at Q2 release +13-15% (previously 9-12%) driving revenue to $918 MM at the mid-point of guidance $912-928 MM. SSS outlook underpinned by higher transaction count as pet owners return to pre-pandemic shopping behaviour, with notable increase in traffic drivers like self-serve dog wash.

• Gross margin assumptions reflect i) rational competitive dynamics around promotional activity, ii) the Company’s strong and deliberate positioning in proprietary brands across good/better/best profiles, and iii) traction of its loyalty program with >70% sales penetration. In our view, the combination of market share gains, network growth, fixed cost scaling, franchise structure leverage, and efficiencies should more than offset headwinds.

  Robust industry backdrop underpinned by 3 MM new pets adopted during the pandemic, 80% of which are under two years of age. Upside to long-term aspiration of 1,200+ stores, in our view. PET is currently filling the runway to 2023/24, with white space in both existing and new markets, and in the early innings of leveraging customer insights and incorporating location data in real estate decision process. Our long-term model remains predicated upon 1,200 stores with upside bias as PET takes share of wallet in existing/new markets and the Quebec opportunity comes into focus.

  Capital light franchise model drives FCF growth and conversion, and shareholder returns. Our analysis suggests ample FCF and balance sheet capacity to fund growth, de-lever the balance sheet and, in time, accelerate return of capital to shareholders. Franchise store penetration forecast to rise from 68% in Q2 to 71% at the end of F23, which should drive accelerating FCF conversion and ROIC in the high 30% range, at the high end of the range in our universe of coverage.

  Results support PET’s premium valuation, reiterating OP rating underpinned by sustainable growth, FCF generation, and high-return franchise model. PET trading at ~14.2x NTM EBITDA(Ex. 5), slightly below the post-IPO average. On a relative basis, trading multiple is well below DOL, largely in-line with ATZ.