June 23, 2021 - Today, Pet Value announced that it priced its IPO at $20 per share, above expectations. This gives the company a slightly higher valuation than previously estimated. Unfortunately, the Final Long-term prospectus is still lacking in details, so we don't have much else to go off of before it begins trading which is expected to be tomorrow - Thursday, June 24 under the symbol "PET".
June 14, 2021 - Late last week, Pet Value filed an amendment to its preliminary prospectus and as per the filing, Pet Value expects to raise $275M at prices between $15-19.00 per share.
At the the lowpoint ($15), midpoint ($17) and highpoint ($19) of the estimated price range, approximately 18,333,000, 16,176,000 or 14,473,000 shares, respectively, will be offered pursuant to the offering. That gives the company a valuation of $1.1-1.3 Billion.
Assuming the company prices at the mid-rage, this gives it a P/S and P/E ratios of 1.80 and 45.70 respectively. On the one side, it looks reasonably priced, but on the other it looks quite expensive. It is however important to note that the pandemic has impacted net incoming in 2020, so the P/E is likely inflated.
Since pricing is not finalized, it also hasn't update its pro-forma statements in terms of financial position, so we cannot calculate Enterprise value. At first glance, it appears to be trading at a slight premium to WOOF in the US, and at a discount to Dollarama which we used as a comparison as they have similar models and growth profile.
Seems reasonably priced here, but once again we'd like to see clarity on the debt load post closing of the transaction.
June 10, 2021 - Earlier this week, Pet Value Holdings filed its preliminary prospectus as it seeks to list on the TSX. Details of the offering including price, shares to issue and capital raise amounts have yet to be disclosed. The company expects to list under the symbol "PET".
According to a Globe & Market article from early May, sources say the company is looking to raise $300M.
Pet Valu is Canada’s leading small format specialty retailer and wholesale distributor of pet food and pet-related supplies with over 600 corporate-owned and franchised locations across the country.
Of note, Pet Value was previously listed on the TSX under the symbol "PVC" before being bought and take private by Roark Capital back in August, 2009 for $144M.
It it worth noting that prior to the closing of the IPO, Pet Valu Holdings will sell all of the shares of its U.S. subsidiary PRB Inc., which is the owner of U.S. businesses Pet Valu, Inc. and PSI, to the company’s existing shareholders. These business have been operating indepenently with unique management teams since this past July.
Pet Valu, Inc. is currently in dissolution, having closed all of its stores on December 30, 2020. As of the closing, Pet Valu Holdings will have no economic interest in PRB Inc. or any of its subsidiaries, any inter-company indebtedness will be extinguished and Pet Valu Holdings will not have any operations in the U.S.
As a consumer defensive company, Pet Value is certain to generate some interest. The pandemic has actually resulted in increased pet ownership and as Canada's largest pet retailer (60% of Canada's population is within 5km radius of its more than 600 stores), it stands to benefit.
Over the past five years, the company has averaged 10% same store sales (SSS) growth and has EBITDA has grown at a CAGR of 9% over the past three years. For its part, net income has grown in the low single digits.
Not surprisingly, pet food and treats account for 70% of sales and drive recurring and repeating store traffic. It has over 1,500 items and its propriety brands account for 30% of system wide sales. As of end of year, it had 1.4 million active loyalty members with a penetration level of 53% of revenue. Worth noting, loyalty members average basket size is 72% bigger than non-loyalty members. Plenty of room to leverage this key area of growth.
It is also worth noting that the company has a pretty big debt load - ~$700M in LTD as of April 3, 2021 against cash of only $11M. While free cash flow profile is impressive, that debt load is an issue as it is coming due in Fiscal 2022. The company paid $64M in interest payments last year and has an interest coverage ratio of 1.62 which isn't great. A ratio of 1.5 is usually a warning sign.
What isn't clear is what that will look like on a pro-forma basis once the offering is closed. We do know that it expects to repay any amount outstanding on the old credit agreement which will be replaced by a new credit agreement which will comprised of a $355M term facility and a $130M revolving facility. We will be taking this into account next update as all their pro-forma details are currently blank.
Interestingly, the company plans on paying a dividend in the amount of $0.04 per share and the first dividend will be payable for the period of September 30, 2021.
The company's growth strategy is pretty simple. Drive SSS growth, expand its network of stores (25-35 new stores in FY 2021) and enhance margins through improved operational initiatives. It is a very easy and simple business model to understand, not unlike a company like Dollarama (TSX:DOL) which has a very similar path to growth.
Since there are no financial details, we can't really go into valuations. However, if we use Dollarama as an example which we think is fair considering it is growing the top line at a similar pace and has a similar growth strategy, we can expect something in these ranges:
- P/S: 3.0-5.0
- P/E: 25.0-35.0
- EV/EBITDA: 13.0-18.0
These are purely guesstimates, but it is where we'd be comfortable taking a closer look.
Of note, earlier this year Petco Health and Wellness (WOOF) IPO'ed on the Nasdaq to much fanfare. The company opened at $26.25 and reached a high of $31.08 on its first day of trading. However, it has since retreated and is now trading at $23.38 which is ~11% below its open price.
It is however, still above its offer price ($18) which came in slightly above its marketed price ($17) - a sign of strong demand. Of note, today WOOF is trading at 20 times EBITDA, 1.04 times sales and has a forward P/E of 47.
While it can be tempting, investors must exercise caution when comparing valuation against US peers. Typically, there are pretty big disconnects in valuations between US listed and Canadian listed stocks. US stocks tend to command premiums - we see this across many industries like technology, healthcare, REITs, etc. There are however, occasions where the opposite happens.
Case in point, Dollarama is trading at big premiums to Dollar General (DG) and Dollar Tree (DLTR).
It does however, give us an idea as to what to expect and based on what WOOF is trading at, the ranges listed above seem reasonable all things considered. As usual, we will provide an update once we have more details on the company's pricing.