Description

Summary

Primo Water Corporation (NYSE/TSX: PRMW) (“Primo” or the “Company”) is the only publicly traded pure-play consumer drinking water company and is a market leader in home/office water delivery (HOD), refill, exchange, and water dispensers, serving both residential and commercial customers. The Company has a new CEO, an improved Board, and most importantly a renewed focus on the North American market, we estimate that Primo could be worth $28+ / share (~100% upside).

We think Primo presents a very attractive opportunity for multiple reasons 1) the water industry has secular tailwinds, has been growing steadily, and is recession resilient, 2) Primo is the market leader in its industry, 3) Primo has many operational improvements it could make to further accelerate profitable growth, 4) an attractive valuation and entry point, and 5) Primo is an excellent ESG story, which to-date has garnered minimal attention.

Business Overview

Following the sale of most of the Company’s European business, completed in early 2024, Primo will soon become a focused North American water pure-play, once the remaining international assets get sold in 2024.

Water represents approximately 35% of total US beverage consumption. Bottled water specifically has increased its share of the beverage market from 13% in 2010 to ~22% now, while soft drinks / carbonated beverages have lost share as consumer preferences have switched to healthier alternatives. Another source of growth for bottled water is concern about the safety of tap water throughout the U.S. Infrastructure deterioration makes bottled/filtered water a necessity in many places and municipal water systems continue to be challenged across the country. Bottled water allows consumers to properly hydrate, and Primo provides environmentally friendly solutions in various forms. Given the longstanding, growing, and resilient demand for reliably clean water, Primo, as the leader in water distribution, is in a prime position to capitalize on this opportunity.

Primo operates largely under a recurring revenue mode, specifically a “razor / razorblade” model because the initial sale of a product creates a base of users who frequently purchase complementary consumable products. The razor in Primo’s revenue model is its industry leading line-up of innovative water dispensers. The dispensers help increase household and business penetration, which drives recurring purchases of Primo’s razorblade offering or water solutions. Primo’s razorblade offering is comprised of Water Direct, Water Exchange, and Water Refill, and Primo holds top market positions across all offerings.

• Water Direct is the business of direct delivery of 3-gallon or 5-gallon water jugs to 2.245mm customers, both residential and commercial, who are serviced by a network of trucks and drivers. Primo holds #1 market position in the US with ~35% of market share and a footprint which covers 90% of the US population.

• Besides water delivery, Primo also provides price-conscious customers with valuable water solutions such as water refill and water exchange and has 90% market share in both.

  • The Exchange service is comprised of racks at retail locations where consumers come and return a consumed water jug (generally 5-gallons) for a new pre-filled water jug.

  • Water Refill is the most affordable consumer offering and is comprised of a network of refill machines where consumers refill their own water jug using a refill machine that is generally located either inside or outside a retailer location at an average price of $0.50 per gallon.

• Lastly, the Water Filtration business connects filter appliances directly to the existing water supply in homes and businesses, reducing potentially harmful impurities and other contaminants that may be found in tap water.

A key catalyst to drive upside in Primo stock is the new leadership at Primo, a key element in unlocking value for shareholders in our view. In 2022, Legion Partners, an activist firm, began to agitate for change at Primo. Over the course of 2022 and 2023, this agitation led to 2 new directors (Derek Lewis and Lori Marcus) and a new CEO (Robbert Rietbroek), all with experience in the beverage industry, being added to the Company. The new directors and the CEO changes are significant victories for shareholders, as we believe that CEO changes can improve the probability of achieving success going forward. A new CEO, especially an external hire like Primo’s new CEO, is well positioned to review past strategic choices and determine what adjustments should be made to fundamentally improve the Company going forward. These changes often come with other C-suite and leadership upgrades, as the new CEO fields an enhanced team to bolster the odds of success.

While Primo stock currently trades in the mid-teens, we see two paths to higher value. Primo operates in an industry that is highly attractive to both private equity and strategic buyers, and the recent refocus of the business to North America has likely made the Company even more interesting to potential buyers. The remaining US focused business is a category leader and management guided $375mm of 2023 EBITDA. When we roll-forward this EBITDA estimate to 2024, we expect the amount to grow by ~10% to ~$415mm as Primo continues to drive profit improvement and revenue growth. We believe that the proper multiple for this business is in the range of 12x to 14x. The closest peer, Nestle Waters, traded its water business in 2021 for a multiple of 10x, but one must deconstruct this multiple as half the EBITDA was from a low margin, single-use water bottle business. The comparable portion to Primo traded at 12x when one takes out the lower margin, lower multiple part. Using the low end of our 12x to 14x range, it would imply a Primo enterprise value of $5B. Post business sales, Primo will have $983mm in cash and $1,440mm in debt (this assumes the cash is just sitting on the balance sheet). So, the net value for equity holders is $4.5B against 160mm shares outstanding, which equals $28 per share – making Primo a primo stock pick in our view!

Catalyst

New CEO improves profits and reinvigorates growth

Sale of rest of non-US business - further simplifies

Stock re-rates or PRMW is likely consolidated - too cheap for such a great business