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Funding Thesis
In continuation with our protection on Primo Water (NYSE:PRMW), we had rated the inventory Purchase pushed by its ongoing transformational shift in the direction of a pure play water options firm over the previous couple of years, enhancing operational and monetary profile together with relative undervaluation. Sentiment was weak heading into Q3 because of macro headwinds however shortly rebounded put up its earnings pushed by continued robust progress. The corporate lately reported one other robust quarter and beat estimates and whereas the beat was not adopted by means of on elevating estimates, we imagine conservatism is probably going constructed with the appointment of latest CEO. It additional reinvigorates its focus to develop into a number one North American water options supplier after divesting its majority of Worldwide enterprise at a beautiful valuation. We reiterate our Purchase score with a goal worth of $18 (at 9.3x EV/ Fwd EBITDA, in line with its historic common)
One other Robust Quarter
The corporate reported one other robust quarter with Q3 revenues growing by 6% YoY to $622 mn, largely consistent with the consensus estimates pegged at $624 mn and was at actual midpoint of the corporate’s steering. Revenues in North America grew by 5% YoY pushed by outperformance inside Water refill/ filtration (up 18% YoY) and Different Water (up 41% YoY) whereas Water Direct/ Trade (up 7% YoY) and Dispenser gross sales (down 30% YoY) got here in beneath estimates. The robust progress was pushed by continued comply with by means of on pricing actions (though modest in comparison with earlier quarters) in addition to resilient demand from residential and enterprise customers. Dispenser sell-through declined 7% YoY and regular on sequential foundation whereas income per route elevated by 7% YoY demonstrating continued advantages from route optimization and efficiencies. ROW gross sales remained a shock up 10% YoY pushed by robust progress in each Water Direct/ Trade phase (up 10% YoY) together with Water Refill/ filtration phase (up 24% YoY). This was largely because of pricing actions together with favorable Fx advantages which had largely been a headwind over the previous a number of quarters.
Gross margins improved by 250 bps YoY to 62.1% and flat sequentially pushed by pricing initiatives together with operational efficiencies with no overlapping affect of from the exit of single bottle retail. SG&A bills leveraged by 20 bps on the again of income progress outpacing mounted prices together with route efficiencies partially offset by enhance in promoting and working prices. Adj. EBITDA margin got here in at report 22.7%, up 270 bps YoY, beating consensus estimates. In all, it reported an EPS of $0.33, forward of the consensus estimates pegged at $0.26.
Steadiness sheet place continues to enhance with the corporate ending with a money stability of $98 mn and complete debt excellent of $1.45 bn (no maturities till 2028) with a web leverage ratio easing to 2.9x from 3.4x on the finish of 2022 and three.3x final quarter. The corporate additional expanded its share repurchase program from $50 mn to $75 mn which can present additional assist to the inventory.
Divestment of Worldwide Enterprise
The corporate introduced the divestment of majority portion of its worldwide enterprise to Culligan Worldwide for $575 mn, implying an EV/ TTM EBITDA of 11x. The corporate plans to make use of the proceeds to pay down its money move revolver stability and enhance its share repurchases by $25 mn (to $75 mn in complete) and accelerating its long-term purpose of sustaining <2.5x web leverage ratio. The corporate was capable of reap a beautiful worth at 11x EV/EBITDA in comparison with the 7.5x EV/EBITDA PRMW paid for the enterprise in 2016. The transaction can be accretive to the earnings because it trades at <8x EV/ TTM EBITDA whereas the transaction a number of being considerably increased. PRMW additionally famous that it’s pursuing strategic alternate options for the worldwide enterprise not included within the transaction i.e. Aimia Meals, UK, Portugal, and Israel companies and count on to divest them by 2024 with advertising and marketing efforts having began lately. The remaining enterprise is probably producing an EBITDA of ~$30-$40 mn however might not fetch the precise a number of prefer it did for the opposite worldwide enterprise it already offered.
We imagine the transaction is enticing for it should allow them to leverage and consolidate its place within the enticing North American market, potential for few further tuck-in M&A, bolster its stability sheet optionality together with potential for shareholder actions resembling share repurchases and dividends.
Steerage Barely Disappointing
Regardless of the corporate delivering a powerful EBITDA beat for the quarter, the corporate didn’t comply with by means of on its steering for This fall and reiterated the steering for the total yr for revenues of $2,320-2,360 mn (up 4.7 – 6.5% YoY) and adjusted EBITDA of $460-480 mn whereas barely growing the FCF steering from $150 mn to $160 mn. This suggests a This fall EBITDA of $108-$118 mn beneath the implied consensus expectation of $115 – $125 mn which was barely disappointing. Nonetheless, we imagine conservatism is probably going being constructed because of the affect of Israel continues to be unknown with the corporate roping in a brand new administration CEO Robbert Rietbroek with vital management expertise in CPG trade every week again.
We proceed to imagine that the corporate is probably going be capable to obtain mid single digit pricing progress going ahead and MSD to HSD income progress within the Remaining Firm whereas sturdy EBITDA margins proceed to be a optimistic shock and is prone to preserve a 21%+ margin coming into 2024 after the exit of its Worldwide enterprise.
Valuation
PRMW continues to commerce at an EV/EBITDA of simply 7.8x at a major low cost to its friends in addition to at a reduction to its historic common. We proceed to worth PRMW at 9.3x EV/ EBITDA and reiterate a goal worth of $18.
Dangers to Ranking
Dangers to score embody
1) Continued Macro challenges and extended slowdown might result in demand headwinds and the corporate might must resort to pricing modifications (which has been the important thing contributor for income progress previous couple of quarters)
2) Antagonistic FX strikes generally is a drag on total P&L (whereas Fx contributed positively to income progress in Q3, it declined by 4% in Q2 and a couple of% in Q1 attributable to FX)
3) Execution challenges might result in stagnating or declining income per route which has additionally been a driver to income progress aside from pricing
Closing Ideas
We imagine the corporate continues to take steps in the fitting path persevering with with its transformational journey over the previous a number of years. The appointment of its CEO and the divestment of its Worldwide enterprise removes a key overhang and we imagine the corporate is poised to consolidate and increase its place inside its focus space in North America. Reiterate Purchase with goal worth of $18 (at 9.3x Fwd EBITDA)