Premium Brands Holdings Corp

Premium Brands Holdings Corp (TSX: PBH) is engaged in specialty food manufacturing and premium food distribution and wholesale businesses with operations across Canada and the United States. It offers its products and services under various brands, such as Harvest Meats, Penguin Meat Supply, Yorkshire Valley Farms and Ready Seafood.

Key highlights 

• Acquisition: Recently, the Company announced that Premium Brands and a Mi’kmaq First Nations Coalition jointly acquire Clearwater, Atlantic Canada’s most extensive wild seafood company. The combined seafood operations of Clearwater, Premium Brands and the Participating Communities is expected to generate more than CAD 1.3 billion in annual sales, with the majority of Clearwater’s sales (approximately 89%) outside of Canada. The Transaction is expected to have immediate double-digit earnings per share accretion for Premium Brands.

• Widely diversified products and customers: The company holds a highly diversified products basket and theChannel and Customer Diversification. The group churns 66.2% of the total revenue from Specialty foods basket and rests 33.8% from premium foods distribution. We believe this pie is likely to change as the added synergies from the recent acquisition would play a vital role in increasing the premium foods distribution segment.

Source: Company

• Regular dividend distribution: At this tepid time when most of the companies had suspended or lowered this distribution exercise, the group continues with a healthy track record of growing dividend payment. The company announced a fourth-quarter dividend of CAD 0.5775 per unit payable on 15th January 2021, with a record date of 31st December 2020. 

Financial highlights of Q3 3030 (in millions of Canadian dollars)

Source: Company 

• In Q3 2020, the company posted revenue of CAD 1.1 billion, which increased by 13.7% compared to CAD 968.3 million in the previous corresponding period. The increase in revenue was primarily due to the company's organic volume growth of 9.1% and business acquisitions during the same period.

• The company posted a gross profit of CAD 213.7 million, increased by 12% in Q3 2020, compared to CAD 190.6 million in Q3 2019, primarily due to increased revenue and change in sales mix.

• The company posted a net income of CAD 34.7 million, increased by 29% in Q3 2020, compared to CAD 26.9 million in the previous corresponding period. The increase in net income was due to low plant start-up and restructuring cost, and lower interest cost in the reported quarter. 

Risks associated with investment

The performance of the company’s business is prone to several risks which could affect its financial performance. Risks related to resource supply, food processing, suppliers, customers, competition, inflation, foreign exchange exposure, etc., are beyond management control. 

Valuation Methodology (Illustrative): Price to Earnings 

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

Stock recommendation

The Company would receive stable annual cash flows from Clearwater, while ensuring Clearwater is well capitalized to execute its business plan, including funding its maintenance and growth capital requirements. Furthermore, the group has well-established brands and has a significant presence across the North American market, along a strong client base, which ensures stable business performance. The sales in many of the Company's selling channels have returned to, or surpassed, pre COVID-19 levels, sales in the fine dining, airline and cruise line channels continue to be challenged. We have valued the stock using the price to earnings value-based relative valuation method and have arrived at a target upside of single-digit (percentage terms). Hence, we recommend a "Watch" stance on the stock at the closing market price of CAD 100.39 on January 11, 2021. We have considered Park Lawn Corp, Freshii Inc, Maple Leaf Foods Inc, etc. as the comparison's peer group.

Source: Refinitiv (Thomson Reuters)

Dollarama Inc.

Dollarama Inc. (TSX: DOL) is a Canada-based company that has retail operations across Canadian province. The Company offers an assortment of general merchandise, consumable products and seasonal products, including private label and nationally branded products.

Key highlights

• Leadership succession: The company announced the appointment of Jean-Philippe (J.P.) Towner as the chief financial officer, effective March 1, 2021. Mr Towner will succeed Michael Ross, who will step down as chief financial officer after over a decade with Dollarama in this role.

• Rise in Comparable store sales:In Q3 2021 the company reported an increase in comparable-store sales, which increased by 7.1%, consisting of a 26.3% increase in average transaction size, while the number of transactions decreased by 15.2% because of the reduced customer's frequency of store visits. 

Source: Company

• Increase in dividend distribution: The Company increased its quarterly dividend by 6.8%, from CAD 0.044 to CAD 0.047 per common share. Increase in dividend amid a challenging time shows the operational resiliency of the group. 

• Ample liquidity: The Company generates sufficient cash flows from operating activities to fund its planned growth strategy in Canada and Latin America. As on 1st November 2020, the Company had CAD 444.7 million of cash and CAD 798.8 million undrawn under its Credit Facility. 

Financial overview of Q3 2021

Source: Company

• In Q3 2021, the Company reported its Sales at CAD 1,064.2 million, increased by 12.3% compared to CAD 947.6 million in the previous corresponding period. The rise in revenue was primarily due to higher sales of summer and other seasonal items and household essentials, coupled with an increase in total operating stores.
• Gross margin in the reported quarter stood at CAD 468.7 million or 44.0% of sales, compared to CAD 413.8 million or 43.7% of sales in the pcp. Higher sales of higher-margin products primarily drive this increase.
• The Company reported higher net income in Q3 2021 to CAD 161.8 million, compared to CAD 138.6 million in Q3 2020. The rise in net income was primarily due to above-stated reasons, partially offset by higher SG&A expenses and higher depreciation. 

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 Earnings

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The Company reported robust performance in the third quarter of Fiscal 2021, highlighted by a double-digit increase in sales, robust same-store sales growth, and an industry-leading gross margin. However, the recent resurgence in COVID-19 cases in the second half of the third quarter has prompted certain provincial governments to re-introduce emergency measures, including the mandatory closure of certain types of businesses in Ontario. We believe that there will be limited impact as the Company falls in the "essential" category. The Company also intends to use the net proceeds from its recent issuance of the 1.505% Fixed Rate Notes to repay the CAD 300.0 million aggregate principal amount of outstanding debt due on 1st February 2021 and general corporate purposes. Therefore, based on the above rationale and valuation, we have given a "Watch" rating at the closing price of CAD 54.01 on January 11, 2020. We have considered Park Lawn Corp, Saputo Inc, and Metro Inc etc. as the peer group.

Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.