Maple Leaf Foods Inc. (TSX: MFI) is a Canada-based company that produces food products. It operates through two segments: The Meat Protein Group and the Plant Protein Group. The Meat Protein Group is comprised of prepared meats, ready-to-cook and ready-to-serve meals, hog production and value-added fresh pork and poultry products that are sold to retail, foodservice and industrial channels. The Plant Protein Group is comprised of refrigerated plant protein products, premium grain-based protein and vegan cheese products sold to retail, foodservice and industrial channel. It operates across Canada, the United States and Asia and offers its products under various brands, such as Maple Leaf, Maple Leaf Prime, Maple Leaf Natural Selections, Schneiders, Schneiders Country Naturals, Mina, Greenfield Natural Meat Co., Lightlife, Field Roast Grain Meat Co. and Swift.

Investment Rationale

Building a Foundation for Long-Term Sustained Growth: The company is focusing on long term sustained growth and taking a lot of initiatives for this. The company is revamping its product pipeline to meet the changing needs of the consumer. The company is planning to launch new brands with reformulated recipes in 2021. The company is enhancing its distribution by building new partnerships with several retail stores.

Source: Company Presentation

Well-defined Brands: The group is having two well-defined strategies and leading brands to support the growth momentum in future.

 Source: Company Presentation

Reported Solid Sequential Performance: The company’s top-line improved by 11.1% on a sequential quarter basis. The strong revenue growth was largely driven by growth in both meat and Plant Protein segments. The Meat Protein segment sales grew 11.3% driven by continued execution of strategies in sustainable meats and brand renovation, as well as the impact of an extra week in 2020. Plant Protein Group sales grew 5.5% or 6.7% excluding foreign exchange impacts, below expectations due to soft demand in certain retail products and foodservice activity.

Source: Company Presentation

Meat Segment Continues to Deliver Compelling Growth: MFI Meat Protein segment reported double-digit growth and market share expansion across renovated Maple Leaf & Schneiders brands. The Meat Protein Group is comprised of prepared meats, ready-to-cook and ready-to-serve meals, snack kits, value-added fresh pork and poultry products. Revenue in the fourth quarter improved by 11.3% to CAD 1,080.3 million compared to CAD 970.3 million last year. Sales growth was driven by a favourable mix-shift towards sustainable meats and branded products in Canada, strong double-digit growth in sustainable meats in the U.S., pricing actions implemented to mitigate inflation and other structural cost increases and an extra week in the fourth quarter of 2020. Further, stronger demand in the retail channel as a result of COVID-19 was offset by lower volume in foodservice.

Source: Company Presentation

Building an Efficient Supply Chain: The company is optimizing the existing plant protein asset base to increase output and leveraging the Maple Leaf network to support profitable growth & scaling up of innovation pipeline. Also, the company has announced the acquisition and build-out of the Indianapolis food processing facility to meet high demand and growth. 

Key Large-Scale Capital Projects

Source: Refinitiv (Thomson Reuters)

Positive Outlook for 2021: Throughout the COVID-19 Pandemic, the group has ensured continuity of its supply chain; however, operating costs does increase in the same period. For FY21, the group is expecting to achieve the following:

• Meat Protein Segment: The company is anticipating a mid-to-high single digit sales growth on a 52-week comparable basis, driven by continued momentum in sustainable meats, leveraging brand renovation, and growth into the U.S. market. The company is expecting adjusted EBITDA margin expansion and progressing towards the 2022 target of 14% -16%, driven by mix-shift benefits in prepared meats resulting from growth in sustainable meats and brand renovation, as well as operational efficiencies. The company is assuming pork complex conditions in-line with the 5-year average.
• Plant Protein Segment: The group is expecting that Sales growth for the year to be broadly in-line with the strategic target of 30%, excluding any impact from fluctuations in foreign exchange. Growth is expected to be driven by continued momentum in the core product line, improved velocities and distribution in the fresh line and resurgence in foodservice activity following the abatement of COVID-19 restrictions.

RSI Indicating Increase in Buying Interest: The leading momentum indicator, 14-day RSI, is showing improved buying interest in the MFI counter as 14-day RSI is now hovering in neutral territory. Further, the stock also gained approximately 3% over the past two days. Further, after taking support near the crucial short-term support level of 50-day SMA, the stock is moving higher. Therefore, we believe that the stock is carrying the potential to move from the current price level.

Technical Price Chart (as on April 16, 2021). Source: Refinitiv (Thomson Reuters)

Risk Associated to Investment: The Company is exposed to price risk related to commodities such as live hogs, fuel costs, and purchases of certain other agricultural commodities used as raw materials, including feed grains. Also, the company is exposed to currency exchange risk as 28% of the group’s total revenue comes from abroad i.e. U.S, Japan and Other countries.

Financial Highlights: Q4FY20 and FY20

Source: Company Filing

• Sales for the fourth quarter increased 11.1% to CAD 1,129.2 million compared to CAD 1,016.0 million last year. Sales growth was driven by strong growth in both the Meat and Plant Protein Groups. An extra week in the fourth quarter of 2020 also contributed to sales growth.
• Net Earnings for the fourth quarter of 2020 were CAD 25.4 million (CAD 0.20 per basic share) compared to CAD 17.5 million (CAD 0.14 per basic share) last year. Strong commercial performance in the Meat Protein Group more than offset incremental costs related to COVID-19 and an increase in variable compensation.
• Results were also impacted by a higher loss from non-cash fair value changes in biological assets and derivative contracts and non-recurring other expenses, which are excluded from the calculation of Adjusted Operating Earnings.
• Adjusted Operating Earnings for the fourth quarter of 2020 were CAD 59.2 million compared to CAD 28.4 million. The increase in Adjusted Operating Earnings reflects strong commercial performance in meat protein, driven by favourable sales mix, continued growth in sustainable meats and pricing actions taken to mitigate inflation and other structural cost increases. Results also benefited from lower SG&A investments in Plant Protein.
• On Full-year basis, the group’s topline for 2020 were CAD 4,303.7 million compared to CAD 3,941.5 million last year, an increase of 9.2%, driven by strong growth in both the Meat and Plant Protein Groups.
• Net earnings for 2020 were CAD 113.3 million (CAD 0.92 per basic share) compared to CAD 74.6 million (CAD 0.60 per basic share) last year. Strong commercial performance in the Meat Protein Group more than offset incremental costs related to COVID-19, strategic investments in the Plant Protein Group, as well as a non-recurring favourable resolution of an income tax audit last year.
• Adjusted Operating Earnings for 2020 were CAD 207.9 million compared to CAD 145.4 million last year, and Adjusted Earnings per Share for 2020 were CAD 1.02 compared to CAD 0.68 last year.

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 59.6% of the total shareholding. Michael Harrison and RBC Global Asset Management hold the company's maximum interests at 39.17% and 9.90%, respectively. The company's institutional ownership stood at 27.8%, and ownership of the strategic entities stood at 39.7%.

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: Q4FY20 capped off a record performance year, with strong top-line gains coupled with solid Adjusted EBITDA Margin expansion. The company has repositioned its portfolio towards two high-growth categories, now representing 20% of their annual sales generating a compounded growth rate in excess of 25% over the last three years.  The management remains confident in their long-term position supported by innovation and brand investment.

Further, in the Meat Protein segment, the group expects a mid-to-high single-digit sales growth on a 52-week comparable basis, driven by continued momentum in sustainable meats, leveraging brand renovation, and growth into the U.S. market. In-Plant Protein segment Sales growth for the year to be broadly in-line with the strategic target of 30%, excluding any impact from fluctuations in foreign exchange. Growth is expected to be driven by continued momentum in the core product line, improved velocities and distribution in the fresh line and resurgence in foodservice activity following the abatement of COVID-19 restrictions.

Further, its shares are offering a decent dividend yield of 2.65%, which is higher compared to Canada 10-Year risk-free government bond yield of 1.54%.

Therefore, based on the above rationale and valuation, we suggest a “Buy” recommendation at the closing price of CAD 27.21 on April 16, 2021.   

 1-Year Price Chart (as on April 16, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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