CA - Premium Brands Holdings: Huge Potential But Growth Is Slowing Down

2023-03-24 14:01:10 ET

Summary

• PRBZF has about $230 million in unutilized capital and is exploring a lot of opportunities to expand.
• However, the growth was slow in 2022 and the company is currently trading 12% above its intrinsic value.
• I would rate PRBZF as Hold.

Premium Brands Holdings Corporation (PRBZF) has experienced a rapid growth trend since 2016, with a strong short-term financial position and an ambitious goal of achieving $7.2 billion in revenue within five years. The company's strategy revolves around acquiring businesses, and it successfully purchased six companies in the first half of 2022. PRBZF still has a significant amount of unused capital and is exploring new acquisition opportunities, although external macroeconomic factors such as inflation and supply chain disruptions may impact its growth. Unfortunately, the company has not acquired any businesses in the last nine months, and its growth slowed in 2022. As of now, PRBZF is trading above its fair value, and based on this assessment, I would rate PRBZF as Hold.

About the company

Premium Brands Holdings Corporation is a company that produces and distributes food products in Canada and the United States. It operates in two segments, specialty foods, and premium food distribution, and offers a wide range of products including processed meat, deli items, sandwiches, pastries, gourmet products, and more. The company also distributes food products such as meat and seafood, operates retail and concession stores, and provides food and seafood processing, cold storage, and logistics services. Premium Brands Holdings Corporation operates under various brand names and was founded in 1917 in Richmond, Canada.

Recent performance

In 2022, PRBZF sustained its double-digit revenue growth, achieving a record sale of $4.4 billion, almost 16% higher than the previous year. The company was able to maintain a similar growth rate in its bottom-line performance, with net income increasing by over 14%. However, the revenue growth in 2022 was lower compared to previous years, and the company fell short of its EPS consensus for 2022 by $0.04.

PRBZF's primary focus is on acquiring and developing food businesses, and it continued to do so in 2022. During the first half of the year, the company acquired six businesses, resulting in a revenue growth of $43 million.

Strengths

The company's boundless potential for growth is one of its most impressive qualities. PRBZF prioritizes the acquisition of businesses as a means of expanding its network. As mentioned earlier, the company obtained six businesses in 2022 alone, which generated over $40 million in revenue. Currently, one acquisition has been agreed upon, eight are in the negotiation stage, and thirty are in the preliminary stages. This suggests that the company has enormous potential and may continue to achieve significant double-digit growth in the future. Adding to its potential, the company had about $230 million as unutilized capacity in 2022 as mentioned in its latest conference call presentation, and has set a goal of achieving $7.2 billion in its new five-year plan.

The company's potential for success is not solely attributed to its acquisition strategy, but also to its active capital expenditure. In 2022, the company invested over $130 million in various projects, with an expected internal rate of return ((IRR)) of 15% or greater.

Another impressive aspect of the company is its commitment to increasing dividends. The company not only prioritizes revenue growth but also believes in rewarding its investors. Since 2015, the company has consistently increased its total annual dividends, with the exception of 2016. In addition, last year the company had a share repurchase program and bought back over $10 million worth of shares. I believe this demonstrates the management's confidence in the company's future and suggests that they believe the stock is still undervalued.

A review of the financial records of PRBZF indicates the company's resilience by demonstrating financial stability and progress. As previously mentioned, the income statement's top and bottom lines point to double-digit growth. Despite increasing interest rates and inflation, the company maintained its gross profit and net income margins, demonstrating effective management in handling difficult circumstances and achieving returns for the company. The company's short-term outlook appears secure with a current ratio of 2.53x, indicating that it is unlikely to encounter difficulties in meeting its short-term commitments and is likely to perform well in its daily operations.

Weaknesses

PRBZF's primary vulnerabilities are macroeconomic factors that are unfortunately outside of the company's control. The company was forced to adjust its sales prices in response to rising interest rates and inflation, which led to increased cost of sales. This could potentially harm the company as higher prices may reduce demand for its products. This could be a contributing factor to the slower growth or relatively flat sales in certain categories, particularly beef jerky and certain cooked protein categories. The company also encountered issues with supply chain management and labor shortages, as highlighted in its recent earnings call. The company is currently experiencing higher outside storage costs due to inventory variance. These factors may ultimately limit or decrease the company's growth, as evidenced by a slight reduction in revenue growth levels in 2022. The same can be seen below.

Looking Forward

Based on the EV/EBITDA and P/E multiples, my assessment of the intrinsic value of PRBZF is approximately $59.54. The current trading price of the stock is $66.80, indicating that it is overpriced and trading at a premium of 12% above its estimated fair value. The valuations were made using the following assumptions:

Competitors - For comparison and valuation techniques, peers were selected based on the similarity of business and market capitalization. The five companies considered for this purpose are The Simply Good Foods Company (SMPL), Hostess Brands, Inc. (TWNK), Nomad Foods Limited (NOMD), Industrias Bachoco ( IBA ) and J&J Snack Foods Corp. (JJSF).

EV/EBITDA - A peer average of 14.67x was used to compare with PRBZF's 18.72x.

P/E multiple - A peer average of 27.66x was used to compare with PRBZF's 26.89x.

Conclusion

PRBZF shows promise with its track record of successfully acquiring businesses and potential for future growth. Its untapped capacity further adds to its potential. Additionally, the company has a strong financial standing and demonstrates annual growth, which is why I would recommend keeping it on your watchlist.

However, the fact that PRBZF has some headwinds which are beyond its control may limit its growth in the future. The company has recently taken up more debt which has reduced its debt-service coverage ratio. The stock of PRBZF is currently trading nearly 12% above its estimated fair value. This brings me to the initial rating of Hold.

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