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.

Investment Rationale

• Meat Segment Moving Well on the Back of Strong Brand and Supply Chain Strength: Maple's meat business, representing 95% of the group's revenue, grew market share and accelerated topline results, up 9% in FY20 on a YoY basis, while delivering record Adjusted EBITDA of CAD 508 million. These results were primarily on account of the brands' strengths and its supply chain's incredible performance. The company positioned itself well with rising retail sales demand driven by the pandemic while unlocking new levels of efficiency and effectiveness in its network. These strengths enabled the group to overcome the challenges in food service, international trade, market volatility and rising operating costs associated with their COVID response efforts.
  

• Solid Q1FY21 Performance of the Meat Segment: Sales of the Meat segment for the first quarter of 2021 increased 3.3% to CAD 1,013.7 million compared to CAD 981.4 million last year. Sales growth was driven by pricing action implemented in the fourth quarter of 2020 to mitigate inflation and structural cost increases, favourable mix-shift towards sustainable meats and branded product, including growth in the United States, and higher fresh pork sales related to an increase in hogs processed. These factors more than offset an unfavourably impact from foreign exchange, lower prepared meats volumes as the business lapped the surge in retail demand in late March 2020 tied to COVID-19, and lower sales to China. Gross profit for the first quarter of 2021 was CAD 166.1 million (gross margin of 16.4%) compared to CAD 157.3 million (gross margin of 16.0%) last year. Gross profit performance benefited from strong operating performance across the business and mix-shift benefits towards branded product and sustainable meats, which more than offset lower profits in China.
  

• Plant Protein- Offering Long-term Opportunities: The company is expecting 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, product innovation, improved velocities and distribution in the fresh line and resurgence in foodservice activity which is largely tied to the abatement of COVID-19 restrictions. Growth is expected to accelerate as the year progresses.

• Well-defined Strategies and the Leading Brands to Support Business: Maple Leaf Foods is a leading consumer protein company, supported by an iconic portfolio of brands like g Maple Leaf®, Maple Leaf Prime®, Schneiders®, Mina®, Greenfield Natural Meat Co.®, Lightlife® and Field Roast™.
  

• Chasing Market through High Growth Product Portfolio: The company is deliberately repositioning its portfolio towards two high-growth categories, which is now generating a compounded growth rate in excess of 25% in the last three years.

• Offering Decent Dividend Yield: Regardless of the economic cycle, Maple has a consistent track record of rewarding its shareholders in the form of a dividend. The group has maintained consistency in dividend payment over the last decade. Further, at the last closing price, its shares were offering a decent dividend yield of 2.74%, which is reasonably higher than the 10-Year Canada Government Bond Yield of ~1.4%. Therefore, Maple shares are also providing holding headroom for the investors.

Dividend Distribution Chart, Analysis by Kalkine Group

• Positive Outlook: In the meat segment, the company is expecting 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. Further, adjusted EBITDA margin expansion, 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 while assuming pork complex conditions in line with the 5-year average. This outlook incorporates the impact of an unexpected surge in grain and hog price inflation, which should moderately compress margins in the second quarter before fully recovering in the back half of the year as related pricing action takes effect.

• 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: Q1FY21

• During the first quarter of 2021, the group’s sales were CAD 1,053.1 million compared to CAD 1,022.8 million in the previous corresponding period. This increase of 3.0%, driven by higher sales in the Meat Protein Group, partially offset by lower sales in the Plant Protein Group.
• Maple’s strong operating and commercial performance in the Meat Protein Group more than offset lower sales volume and capacity utilization in the Plant Protein Group.
• The total gross profit of the company in the quarter under review jumped by 51% to CAD 193 million and gross profit margin improved from 13% in the Q1FY20 to 19% in the Q1FY21.
• Net earnings for the first quarter of 2021 were CAD 47.7 million (CAD 0.39 per basic share) compared to a loss of CAD 3.7 million (a loss of CAD 0.03 per basic share) last year.
• Adjusted Operating Earnings for the first quarter of 2021 were CAD 50.4 million compared to CAD 45.1 million last year, and Adjusted Earnings per Share for the first quarter of 2021 were CAD 0.26 compared to CAD 0.21 last year.
• Cash and cash equivalents were CAD 101.0 million at the end of the Q1FY21, compared to CAD 86.3 million in the same quarter of the previous financial year and CAD 100.8 million as of December 31, 2020. The increase in cash and cash equivalents for the three months ended March 31, 2021, was primarily due to earnings and loans drawn on the Credit Facility, partially offset by investment in property and equipment, investment in working capital, income tax payments, posted derivative margins for its commodity hedging program.
• In the period under consideration, cash used in operating activities for the first quarter of 2021 was CAD 30.2 million compared to CAD 45.8 million in 2020. The improvement was mainly due to higher earnings and lower investment in working capital, partially offset by higher income tax payments and an increase in posted derivative margin for its commodity hedging program.
• Cash provided by financing activities for the first quarter of 2021 was CAD 194.8 million compared to CAD 136.1 million in 2020. The increase was primarily due to larger drawings on the Credit Facility, partially offset by higher dividend payments.
• On May 4, 2021, the Board of Directors approved a quarterly dividend of CAD 0.18 per share, CAD 0.72 per share on an annual basis, payable June 30, 2021, to shareholders of record at the close of business June 8, 2021.

Top 10 Shareholders

Top-10 Shareholders together holds approximately 58.8% stake in the company, with McCain (Michael Harrison) and RBC Global Asset Management Inc. are the major shareholders in the company with an outstanding position of 39.18% and 9.9%, respectively. The institutional ownership in the company stood at 27.6% and strategic ownership in the company stood at 39.72%, respectively.

Valuation Methodology (Illustrative): Price to Earnings 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.

Stock Recommendation: Maple Leaf Foods is a leading consumer protein company, supported by an iconic portfolio of brands, a solid balance sheet and a capital structure that provide financial flexibility. Over the last several years, the company has developed a foundation to pursue compelling growth vectors across its business and to create value for all stakeholders.

Further, the deli meat market is poised to grow strongly during 2021-2025 and expected to record a CAGR of about 8% during the forecast period. Factors such as the growth in organized retail, the increase in product launches, and the rise in demand for packaged meat are the major drivers in the market. Also, approximately 35% of the deli meat market's growth would originate from North America during the forecast period.

Further in the plant protein space, Greenleaf continues to hold the #2 market share position in U.S. retail with the market-leading distribution. And the group continued to advance strategies to increase production capacity, finding creative, capital-efficient solutions to improve agility and efficiencies for the long term. Hence, based on the aforementioned facts and valuation, we recommend a 'Buy' rating on the stock at the closing price of CAD 26.31 on June 11, 2021.

1-Year Technical Price Chart (as on June 11, 2021)

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid at June 14, 2021 price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.