Buy food producer Premium Brands: you can eat your lunch and have it too

Analyst Sheila Broughton, head of research for Western Canadian-based PI Financial, was pleasantly surprised when Premium Brands Holdings Corp. (PBH-TSX) reported stronger than forecast first quarter results.

Saying the company’s outlook remains positive, she reiterated her “buy” recommendation, “average” risk rating and 12-month target price of $27.

Premium Brands manufactures and distributes branded specialty food products including bread, sandwiches, panini, wraps, pastries, muffins, sushi and meat products including deli and halal foods. The company converted from an income trust to a publicly-traded corporation in 2009. It has manufacturing and distribution facilities in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nevada and Washington State.

Premium Brands reported first quarter 2014 results for the period ended March 29, 2014, that were ahead of PI Financial’s expectations.

The first quarter was impacted by the rapid inflation of protein commodity costs. These affected sales pricing, margins and the bottom line. Nevertheless, PI Financial retains its positive outlook for Premium Brands and believes the company remains well positioned for profitable growth.

Ms. Broughton noted first quarter 2014 revenue rose 16 per cent compared to a year earlier to $267 million. This included 7.2 per cent organic growth. That total revenue beat PI’s forecast of $260 million.

First quarter retail sales grew 24 per cent to $172 million, including organic growth of 12.9 per cent. Further sales growth to retail customers was also driven by an increase in the currency-translated value of Premium Brands’ U.S.-based businesses.

Foodservice revenue increased 4.2 per cent organically to $94.7 million.

Price increases to counter rising input costs were offset by the Vancouver port labour dispute and poor weather, which impacted demand.

Total Premium Brands’ adjusted EBITDA increased 25 per cent to $15.9 million. This reflected a $4.7 million gain on a sale/leaseback transaction and the higher revenue levels which were partly offset by higher input costs.

Free cash flow of $46.9 million for the past four quarters leads to a dividend to free cash flow payout ratio of 58 per cent.

PI says the outlook for Premium Brands’ Retail business is strong, with organic growth expected to exceed its target range. This will be driven by a continuation of first quarter 2014 factors and the expected completion of capacity expansion projects.

At the same time, Ms. Broughton expects organic growth at the Foodservice division to return to its six per cent to eight per cent target range in the second quarter of 2014, with more normal weather, increased selling prices and the resolution of the port dispute.

PI Financial is forecasting 2014 revenue to increase 9.2 per cent to $1.171 billion. Other estimates include adjusted EBITDA of $82.3 million and net earnings of $23.2 million, or $1.05 a share.

For 2015, PI forecasts 2015 revenue of $1.242 billion, adjusted EBITDA of $92.4 million, and net earnings of $32.2 million, or $1.46 a share.

PI’s 12-month target of $27 represents an Enterprise Value/EBITDA multiple of 11 times, based on its 2015 forecast. (Enterprise value is market capitalization plus net debt.)



Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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