Premium Brands Holdings

Premium Brands Holdings (TSX: PBH) is engaged in specialty food manufacturing, premium food distribution, and wholesale businesses. The company's business segments include Specialty Foods, Premium Food Distribution, and Corporate. The Specialty Foods segment consists of food manufacturing businesses, which contributes about two-thirds of the group revenue; the Premium Food Distribution segment consists of the company's distribution and wholesale businesses and the Corporate segment includes the company's head office activities along with its finance and information systems.

Key highlights

• Long-term Target: The management expects that within the next five years, it would profitably expand its businesses to develop new sustainable sales opportunities as well as strengthen customer and supply chain relationships. The Company remains confident in its ability to achieve the five-year targets set in 2018 of CAD 6.0 billion in sales and CAD 600 million in adjusted EBITDA.

• Rise in cash flows from operating activities: During Q1 2021, Cash flows generated from operating activities totaled CAD 22.0 million, compared to cash outflow of CAD 20.7 million in Q1 2020. The rise is primarily attributable to an increase in cash flow from working capital explained by business acquisitions and receivable relating to a sale and leaseback transaction and higher inventory levels associated with the Company’s growth.

• Financial Leverage:  The Company uses two key indicators to assess its financial leverage, those are, senior funded debt to adjusted EBITDA and total funded debt to adjusted EBITDA ratios.  At the end of Q1 2021, the Company’s senior funded debt to adjusted EBITDA ratio stood at 2.5x v/s 2.8x in Q1 2020 and its total funded debt to adjusted EBITDA ratio of 3.8x v/s 4.1x in pcp.  Subsequent to the quarter, the group used net proceeds of CAD 151.5 million from the sale and leaseback of certain properties to reduce its senior credit facility.

• Capital allocation: During 2021, the Company invested CAD 28.1 million in project capital expenditures, where in CAD 17.1 million were invested for larger projects and CAD 11.0 million were invested for a variety of smaller projects. Henceforth, a 42,600 square foot expansion of a 91,600 square foot sandwich and ready-to-eat meals production facility in Lakeville, MN, is expected to complete in Q2 2022. The company targets to generate a minimum internal rate of return of 15% on an after tax, unlevered basis on capital expenditure projects.

Financial overview of Q1 2021 (Expressed in millions of CAD)

Source: Company

• In Q1 2021, the Company reported sales of CAD 1,009.8 million, compared to CAD 935.0 million in the previous corresponding period. The rise in revenue was primarily due to growth in both Specialty Foods (SF) and Premium Food Distribution’s (PFD) segments.
• Gross profit in the reported period stood at CAD 193.4 million or 19.2% of sales, compared to CAD 181.0 million or 19.4% of sales in the pcp. Gross profit as a percentage of its revenue for the quarter decreased primarily due to higher input costs for a range of commodities including beef, pork, chicken, cheese, corrugated boxes, and packaging.
• Adjusted EBITDA for the quarter stood at CAD 82.5 million, compared to CAD 64.3 million in Q1 2020.  Adjusted EBITDA for the quarter increased by CAD 18.2 million or 28.3% due to the Company’s growth initiatives including business acquisitions and plant efficiency gains partially offset by the pandemic related factors.
• The Company reported net income at CAD 19.8 million, compared to CAD 12.2 million in Q1 2020. The rise in net income was primarily due to improved earnings before tax partially offset by higher tax expenses. 

Risks associated with investment

The Company’s ability to pay the principal and interest on its debt, or to generate sufficient funds for operations and planned capital expenditures depend on its future performance, which to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, or other factors that are beyond its control. 

Valuation Methodology (Illustrative): Price to Cash Flow

All forecasted figures and peers have been taken from Thomson Reuters. 

Stock recommendation

In Q1 2021, the company achieved solid results. However, the Company is not providing annual sales and adjusted EBITDA guidance for 2021, considering the unprecedented potential impacts and significant uncertainties associated with the of the pandemic over the next several quarters. Although, the company is optimistic regarding its year over year improvement in its sales and adjusted EBITDA through 2021 still there remains considerable uncertainty considering the consumer behavior due to pandemic. We have valued the stock using price to cash flow based relative valuation and arrived at a target price offering mid single digit upside potential (in % terms). We have considered Dollarma, The Northwest Company and Highliner Foods etc., as a peer group for the comparison purpose. Therefore, based on the above rationale and valuation, we recommend a "Watch" rating on the stock at the closing price of CAD 122.35 on May 7, 2021 and suggest investors to wait for the better entry levels.

One-Year Price Chart (as on May 07, 2021). Source: Refinitiv (Thomson Reuters)

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