Pet Valu Holdings Ltd.
Purr, purr, purr: PET solid and in-line Q1 reaffirms constructive view
Our view: Q1 operating metrics within range of expectations, supportive of our Outperform rating. Although reported results are moderated by step-up in investment spending/D&A related to supply chain investments to support growth, underlying performance remains strong, with Q1 adjusted EBITDA +16% (Ex. 1). Tone of the release and conference call confident, noting current performance consistent with historical resiliency of the category, and SSS +0.8% reflecting heightened consumer value seeking behaviour, lower sales of non-essentials. 2024 outlook reiterated. Forecasting 2024E EBITDA growth 10%, with EPS growth resuming in 2025 as Pet Valu moves past peak capex. Tweaking forecasts, target unchanged.
Key points:
Business remains fundamentally strong (Ex. 4). Leaning into innovation and loyalty to drive traffic, share and margins, notably i) modest pricing investments in April/May, ii) personalized promos targeting almost 3 MM active loyalty customers, iii) launch of performatrin CulinaryTM raw and gently cooked line-up, broadening its competitively priced offering at higher-end of market, and iv) rollout of new proprietary SKUs in discretionary hard goods.
Reflecting Q1 results and outlook into our model leaves forecasts essentially unchanged. Our updated 2024E EBITDA is at the high end of guidance range $248-254 MM, with H1<H2 as PET cycles prior year headwinds and surfaces efficiencies. Q2E SSS +0.9% similar to Q1A +0.8% and EBITDA margin 21.0% flat Y/Y, consistent with outlook. Forecasts reflect value-seeking consumer behaviour, normalizing promotional mix, demand headwinds in more discretionary categories, shift to larger pack sizes, higher wholesale revenues, sustained FX headwinds and higher for longer interest rates, partly offset by sustained demand for premium nutrition, store and infrastructure occupancy leverage, rising franchise fees and efficiency gains. Reiterating our view that PET well positioned for mix shift with good/better/best positioning and growing mix of proprietary brands at attractive relative value.
2025E free cash flow yield 4.9% rising to 6.2% in 2026E provides effective valuation backstop, in our view. Near-term free cash flow deployment continues to favour capex and debt repayment with exit rate on financing costs 7.40% (fully variable and -18 bps sequentially). Probable return of capital to shareholders in 2025E as FCF accelerates to >$100 MM, almost 2x our 2024E, caveat being interest rates/cost of debt in 2025.
Reiterate OP rating, PT unchanged. Better flow of funds underpinning increase in valuation with 2024E EV/EBITDA from 9.3x mid-Q4 to 10.8x currently (Ex. 5 & 6), a more appropriate level in our view. PET continues to operate from a position of strength, generating sector-leading ROIC close to 25% amplified by capital-light business model, attractive FCF yield.