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

• Expected full-year recovery in H2FY21: It is expected that MFI's meat protein business margins and plant-based foods revenue growth to make a full recovery in the second half of 2021. Though the company reported a plunge in its second-quarter net profit, it remained focused on sustainable, long-term growth and is on track to improve its meat margins and grow its plant protein sales in the second half of 2021.

• 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 3 years.

• Plant Protein Group - Investing for Growth: The company expect sales growth in the second half of the year of at least 30%, excluding any impact from fluctuations in foreign exchange, in line with the company's long-term strategic target. 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. While the company sees a gradual reopening of the economy in both key markets in North America, there is a lack of full visibility on the potential impact of the fourth wave of COVID-19 on the recovery of the foodservice business.

• Offering a 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 dividend yield of 2.78%, which is reasonably higher than the 10-Year Canada Government Bond Yield of ~1.4%. Therefore, Maple shares are also proving holding headroom for the investors and positioned well for the income-seeking investors as well.

10-Year Dividend Chart. Source: Refinitiv, 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.

• Bullish Technical indicator: Recently, MFI shares strongly crossover the crucial short-term resistance levels of 50-day and 21-day SMAs and continue to hover above it. Further, the leading momentum indicator, the Moving Average Convergence Divergence (MACD), is rising, with the spread between short-length 12-day SMA and long-length 26-day SMA is positive, and the MACD oscillator is hovering above the 9-day SMA signal line. This is another bullish indicator. Also, 14-day RSI is hovering in a neutral zone with a bullish bias at 60.1.

Technical Price Chart (as on August 06, 2021). Source: Refinitiv, Analysis by Kalkine Group

• 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: Q2FY21

Source: Company Filing

• Sales for the second quarter of 2021 were CAD 1,158.9 million compared to CAD 1,094.6 million last year, an increase of 5.9%, driven by higher sales in the Meat Protein Group, partially offset by lower sales in the Plant Protein Group.
• Meat Protein Group segment sales for the second quarter of 2021 increased 7.4% to CAD 1,117.5 million compared to CAD 1,040.4 million last year. Sales growth was driven by higher fresh pork and poultry market values, favourable mix-shift towards branded products and sustainable meats, and higher volumes in the US.
• Gross profit for the second quarter of 2021 was CAD 135.7 million and gross margin of 14.9% v/s CAD 167.3 million, gross margin of 17.0% in pcp. The decrease in gross profit was attributed to strategic investments in capacity to build for anticipated demand, which has resulted in increased overhead and transitory costs. Other factors include lower sales volumes and higher trade expenditures. The second quarter of 2020 was also impacted by significant operational and one-off costs in response to COVID-19.
• Adjusted Operating Earnings for the second quarter of 2021 were CAD 56.4 million compared to CAD 66.7 million last year, and Adjusted Earnings per Share for the second quarter of 2021 were CAD 0.28 compared to CAD 0.35 last year due to similar factors as noted above.
• Net Earnings were CAD 8.8 million compared to CAD 25.7 million in the pcp due to non-cash fair value changes in biological assets and derivative contracts.
• During Q2 FY21, company incurred capex of CAD 166.8 million mainly construction capital of CAD 127.8 million for Ontario poultry facility in the London.

Segment Highlights

Meat Protein Segment

• Sales for the second quarter of 2021 increased 7.4% to CAD 1,117.5 million compared to CAD 1,040.4 million last year. Sales growth was driven by higher fresh pork and poultry market values, favourable mix-shift towards branded products and sustainable meats, and higher volumes in the US.
• Meat Protein segment Gross profit for the second quarter of 2021 was CAD 167.0 million (gross margin of 14.9%) compared to CAD 176.6 million (gross margin of 17.0%) last year. Mix-shift benefits towards growth in branded products and sustainable meats were more than offset by limited access to China and lower margins in primary processing. Gross profit in the second quarter of 2021 was also impacted by high operational and one-off costs in response to COVID-19.

Plant Protein Segment

• Plant Protein segment sales for the second quarter of 2021 decreased 20.7% to CAD 48.1 million compared to CAD 60.6 million last year. Excluding the impact of foreign exchange, sales decreased 10.4%, driven by lower retail volumes as the business lapped surge demand in 2020 tied to COVID-19. This more than offset higher foodservice volumes and pricing action implemented in the fourth quarter of 2020 to mitigate inflation and structural cost increases.
• Plant Protein segment gross profit for the second quarter of 2021 was CAD 0.3 million (gross margin of 0.6%) compared to CAD 7.9 million (gross margin of 13.0%) last year. The decrease in gross profit was attributed to strategic investments in the capacity to build for anticipated demand, which has resulted in increased overhead and transitory costs.

Shareholding Pattern

Top-10 shareholders together holds 58.03% in the company, with McCain (Michael Harrison) and RBC Global Asset Management Inc. are major shareholders with an outstanding position of 39.17% and 9.90%, 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, with an expected 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. The company is well poised to take advantage of increasing demand.

The company's capital expenditure estimate for the full year of 2021 remains unchanged and in the range of CAD 550 million to CAD 650 million, with approximately 75% to be comprised of construction capital. A significant portion of the Construction Capital is related to the London, Ontario poultry facility, the plant protein facility in Indianapolis, Indiana and other projects to add capacity and improve efficiency in their prepared meats business.

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.

Moreover, in the Meat segment, the company is expecting mid-to-high single-digit sales growth, driven by continued momentum in sustainable meats, leveraging brand renovation, and growth into the U.S. market.

Hence, based on the aforementioned facts and valuation, we recommend a 'Buy' rating on the stock at the closing price of CAD 25.91 on August 06, 2021.  

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

1-Year Price Chart (as on August 06, 2021), Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid at August 09, 2021 price as well.

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