Primo Water Corporation

Decent Market Presence, Sound Business Model:  Primo Water Corporation (TSX: PRMW) is a pure-play water solutions provider. The group operates across North America and Europe and provides water dispensers, purified bottled water, and self-service refill drinking water.

Key Highlights:

• On February 28, 2020, the group sold S&D Coffee and Tea business at a price consideration of US$ 405 million.
• During the first quarter, PRMW returned ~US$42 million to its shareholders (US$10 million in quarterly dividends and ~US$32 million through share repurchases).

Q1FY20 Financial Highlights: Primo Water declared its quarterly results, wherein the Company reported an 11% y-o-y jump in revenue to US$ 474.2 million. The increase was driven by a higher demand for water products and services across U.S. and Israeli regions, which was partially offset by the pressures witnessed across European region due to COVID-19. Adjusted EBITDA soared to US$70 million, reflecting a jump of 31% on y-o-y basis, driven by higher revenue and coupled with the positive impact of Legacy Primo acquisition. The Company reported an operating loss of US$ 4 million, as compared to a profit of US$ 0.7 million in pcp, primarily attributable to the higher acquisition and integration expenses. Net loss from continuing operations widened to US$ 27.4 million, from US$ 22.7 million in Q1FY19.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Guidance: For the first half of FY20, the Company is targeting its consolidated revenue from continuing operations within the range of US$ 905 million to US$ 925 million. EBITDA for the same period is expected at ~US$ 140 million.

Valuation Methodology (Illustrative):  EV/EBITDA based Relative Valuation

Note: All forecasted figures and peers have been taken from Refinitiv (Thomson Reuters), NTM-Next Twelve Months

Stock Recommendation: The stock of PRMW corrected ~6% in the last nine months, significantly lower than the broader market. The Company provides water solutions services to its consumer and helps them to access purified, spring, and mineral water. The business model is resilient as it falls under essential services and hence is immune to the economic cycles. The Group has a healthy market presence and an impressive customer base. The Business witnessed decent growth in its other water retail and water dispensers’ segments, and we expect the momentum to continue in coming quarters. In the last one month, the stock has generated a stellar return of ~22%, outperforming the index by 20% and currently trading above its 20 days and 50 days simple moving average (SMA) of CAD 13.82 and CAD 14.53, respectively. We have valued the stock using EV/EBITDA based relative valuation approach and considered industry average of 11.3x on NTM basis and arrived at a target price offering a double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 15.77 as on May 08, 2020.

PRMW One-Year Daily Price Chart, Source: Refinitiv (Thomson Reuters)

Lassonde Industries Inc.

Stable Outlook, Price Correction offers a Good Entry-point: Lassonde Industries Inc. (TSX: LAS.A) is the manufacturer of ready-to-drink fruit and vegetable juices and drinks. The Group also manufactures broths and sauces.

The Management declared a quarterly dividend of CAD 0.65 per share, payable on June 15, 2020.

Q1FY20 Financial Highlights: Lassonde came up with an impressive set of quarterly numbers, wherein the Company’s sales increased 17.1% yoy to CAD 472.44 million, from CAD 403.54 million in the previous corresponding quarter. The increase in sales was driven by growth in private label products coupled with the higher sales volume of national brands followed by a positive impact from foreign exchange. Operating profit soared to CAD 30.35 million, from CAD 23.36 million in Q1FY19. The exuberant growth was driven by a decrease in input cost, especially orange concentrate and the resin used to manufacture plastic bottles. The Group witnessed an increase in salary expenses, warehousing, commissions and transportation costs. Net profit of the Company stood significantly higher at CAD 23.73 million, from CAD 12.78 million in Q1FY20. The Company exited the quarter with cash and cash equivalents of CAD 31.71 million, and a total asset of CAD 1,602.42 million.

Q1FY20 income Statement Highlights (Source: Company Reports)

Valuation Methodology (Illustrative):  Price to Earnings based Relative Valuation

Note: All forecasted figures and peers have been taken from Refinitiv (Thomson Reuters), NTM-Next Twelve Months

Stock Recommendation: The stock of LAS.A corrected ~19% and ~21% in the last six months and one year, respectively. The products of the Company come under the ‘essential goods’, and the demand is expected to remain immune to the economic cycles. The Company foresee improved profitability from the U.S. operations due to strong demand for its products towards the end of the quarter. For FY20, the Company expects an improvement in its revenue and lower input costs augers well for margin expansion. Considering the recent price correction, we believe this is a good entry point considering the product-line and growth story of the business. We have valued the stock using Price to Earnings based relative valuation approach and taken peers like Rogers Sugar Inc (TSX: RSI), Simply Good Foods Co (NYSE: SMPL), B&G Foods Inc (NYSE: BGS)  etc. and arrived at a target price offering a double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 136.43 as on May 08, 2020.

LAS.A One-Year Daily Price Chart, 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.