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  5. PET: Hi there, can you give an update on PET, why the large drop recently and your thoughts on initiating a position at these levels? [Pet Valu Holdings Ltd.]
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Q: Hi there, can you give an update on PET, why the large drop recently and your thoughts on initiating a position at these levels?

Thanks a lot!

Asked by Robert on September 26, 2023
5i Research Answer:

Guidance has been coming in weaker than expected in its latest earnings reports, and there have been some misses in the last couple of quarters. It pays a decent yield of 1.7%, is expected to show nice margin expansion in the coming years, and has a historically high growth rate (~15% to 20% topline growth on average). Although, its leverage is quite high, with a net debt/EBITDA of 3.2X, and in a high and rising interest rate environment, we feel that investors are becoming concerned with its interest expenses. Free cash flow is decent, but has declined over the past couple of years, and its valuation is becoming more reasonable - with a forward sales multiple of 1.6X and a forward earnings multiple of 14.2X. We do not like its recent negative momentum, but we like the company's overall fundamentals. We would prefer to see the stock find some price stability before entering a position here, especially as it is now at its IPO price.