Maple Leaf Foods Inc. (TSX: MFI) is a Canada based consumer-packaged meats company, which produces prepared meats and meals, fresh pork, and poultry and turkey products. The group also has agribusiness operations. These operations supply livestock to the meat products business operations.

Investment Rationale:

• Stable dividend payment: Historically, the company reported consistent dividend payments, despite unfavorable macro scenarios, which is mentioned worthy. Notably, in H1FY21, the company paid a total dividend of CAD 44.375 million, higher than the CAD 39.306 million in pcp. Moreover, the stock carries a dividend yield of ~2.8%, which looks decent considering the current interest rate scenario.

Five years dividend history, Source: REFINITIV, Analysis by Kalkine Group

• Strategic Partnership with Pizza Pizza: Recently, the company reported its strategic collaboration with Canadian pizza chain and quick-serve restaurant leader, Pizza Pizza, wherein the latter is expanding its offerings by using MFI’s items like Plant based Chick’n Sandwich and Plant-Based Chick’n Bites. These products would be available across 400 Pizza outlets in Canada.

• Ambitious long-term outlook: The company is focusing on improving its profitability and is targeting 2022 Adjusted EBITDA margin in the range of 14% to 16% from the current 9.1% in H1FY21 through improving its cost centers and operational efficiencies. The group is also prioritizing on improving its product mix and would push its value-added products in the coming days.
  

• Jump in H1FY21 net profits: The company reported a tremendous surge in profitability and posted net earnings of CAD 56.466 million in H1FY21, which was significantly higher than CAD 21.947 million in pcp, reflecting a growth of 157.3 % on y-o-y basis. The surge was supported by improved top-line and improved costs structures.
  

• Collaboration with PepsiCo Foods: Recently, the company entered into a partnership with PepsiCo Foods, wherein the latter would distribute MFI’s Schneiders Pepperettes, one of MFI’s largest selling brands. We believe, with the profound presence of Pepsi’s c-store and foodservice channels, the group would be able to cater to a larger consumer base across the nation.
  

• Capacity expansion to support upcoming operations: The company is conducting its construction activities across the London Poultry Facility and Indianapolis Tempeh Facility. Both the facilities would be used for increasing the production capacity for its value-added, higher margin poultry and tempeh products. An increase in the sales volumes of high-value products would support the company’s upcoming margins and profitability.
  

• Bullish technical indicators: MFI's price has been consolidating in a price range of CAD 23 to CAD 30 since April 20. The prices are gaining upside momentum for the past couple of months. The price recently started to move upside after taking support at the downward slopping trend line and for the short-term, we can expect continuity in the upward direction. Now the next resistance level for the stock appears at CAD 27.90, and prices may test the level in the coming sessions. A further breakout above CAD 27.90 backed by the volumes may extend buying in the stock.

Technical Price Chart (as on October 1, 2021) Source: REFINITIV, Analysis by Kalkine Group 

• Risks associated with the investment: The company’s operations might be impacted by a change in consumer preference, lower realization of meat and poultry items etc. Moreover, a weak response to the recent launches would impact the company’s overall performance.

Q2FY21 Financial Highlights:

• Improved top-line: In Q2FY21, MFI posted sales of CAD 1,158.861 million, higher than CAD 1,094.574 million in the previous corresponding period (pcp). Sales growth of 7.4% y-o-y was driven by higher commodity pricing for fresh pork and poultry items, favorable consumer mix-shift towards branded products and sustainable meats, coupled with higher volumes from the U.S geography.
• Sluggish Gross Profit: The company’s gross margin stood lower at CAD 135.656 million, as compared to CAD 167.314 million in Q2FY20, due to higher cost of sales (CAD 1,023.205 million v/s CAD 927.260 million in Q2FY20).
• Lower input costs: The quarter was marked by a decline in selling, general and administrative expenses (CAD 110.924 million v/s CAD 117.833 million pcp), a slide in restructuring and other related costs and a decline in Interest expense and other financing costs (CAD 5.711 million v/s CAD 8.068 million in pcp).
• Decline in bottom-line: The group reported a decline in the Net earnings at CAD 8.774 million, as compared to CAD 25.659 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Top-10 Shareholders

Top ten shareholders of the company together hold approximately 56.92% stake, with McCain (Michael Harrison) and RBC Global Asset Management Inc. are the major share holders in the company with an outstanding position of 39.17% and 9.00%, 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:

The company witnessed revival in its operation and reported its H1FY21 meat protein revenue of CAD 2,131.2 million, reflecting a growth of 5.4% on y-o-y basis. For the second half of FY21, the management expects a revival in demand from both Meat Protein and Plant Protein segments, driven by double-digit growth from its Prime RWA and Greenfield Brands. Within the Plant Protein Group, the company expects 30% y-o-y growth in H2FY21, aided by the continued momentum within the core product line, coupled with product innovation, improved velocities and distribution in the fresh line and resurgence in foodservice activity. On the other hand, Meat Protein Group is expected to report a sales growth of mid-to-high single digit in FY21.

We have valued the stock using the price to earnings-based valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Metro Inc, George Weston Ltd and Saputo Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 25.66 on October 01, 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

One-Year Technical Price Chart (as on October 01, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid at October 4, 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.