Primo Water Corporation

Primo Water Corporation (TSX: PRMW) is a leading pure-play water solutions provider in North America, Europe and Israel. The company’s water solutions ecosystem is anchored by an assortment of water dispensers and its water direct business.

Key highlights

• First quarter & Full Year 2021 Outlook: The management expects to book the revenue in Q1 2021 in the range of USD 455-485 million with the adjusted EBITDA in a range of USD 70-75 million. While for FY 2021, the group expect total organic revenue growth of ~5%, which would deliver an Adjusted EBITDA in a range of USD 370-380 million.

Source: Company

• Impressive performance: In 2020, despite a difficult operating environment and increased lockdown measures in many of the geographies the company serve, it generated good topline, adjusted EBITDA and adjusted free cash flow growth. Revenue was up 9% to USD1,954 million, adjusted EBITDA increased 26% to USD362 million, and adjusted free cash flow rose 14% to USD 138 million.

Source: Company

• Expanding customer base: The group is concentrating on growing its client base in the residential to small and medium-sized business sectors. It plans to use its e-commerce capability to extend the customer base and maximize penetration. The organization hopes to enter this business segment by leveraging the deep direct-to-consumer distribution network, foreign sales and marketing activities, and strategic alliances.

• Event update: The Company will release its first quarter ended April 3, 2021 financial results before the markets open on Thursday, May 6, 2021.

Financial overview of FY2020 (in millions of USD)

Source: Company

• In FY20, the company’s revenue increased by 9% to USD 1,953.5 million, against USD 1,795.4 million in the previous corresponding period. The increase was driven mainly by the legacy Primo acquisition along with increased demand for products and services from residential customers.
• Gross profit for FY2020 increased to USD 1,113.9 million, against USD 1,061.2 million in pcp. Gross margin stood at 57.0% compared to 59.1%, primarily due to lower gross profit in the ROW segment.
• The company witnessed higher SG&A expenses along with impairment charges of USD 115.2 million, due to which it reported operating loss of USD 52.2 million compared to a profit of USD 75.0 million in pcp.
• Net loss for the reported period stood at USD 131.7 million, against a profit of USD 2.9 million in pcp, primarily due to above discussed points. 

Risks associated with investment

Continued economic uncertainty can adversely affect the group’s customer’s financial condition, resulting in an inability to pay for its services or products and reduced or cancelled orders of the group’s services or products. Such adverse changes could lead to a slide in the company’s top line and bottom line.  

Valuation Methodology (Illustrative): Price to Earnings

  Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company witnessed growth in revenue, adjusted EBITDA and free cash flow despite tepid scenario. Furthermore, the group is concentrating on growing its client base in the residential to small and medium-sized business sectors. It plans to use its e-commerce capability to extend the customer base and maximize penetration. We believe this integrated digital strategy would allow the group to provide seamless and improved consumer experience and long-term growth. Therefore, based on the rationales discussed above and valuation, we recommend a “Hold” rating at the closing price of CAD 20.60 as on April 19, 2021. We have considered Monster Beverage Corp, Chemed Corp, Terminix Global Holdings Inc, etc. as the peer group for the comparison.

1-Year Price Chart (as on April 19, 2021). Source: Refinitiv (Thomson Reuters)

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