Saputo Inc. (TSX: SAP) is a dairy processor and cheese producer which has a presence across Canada, the USA, Argentina, the United Kingdom, and Australia and sells products across more than fifty countries. 

• Recent acquisition to boost upcoming performance: Recently, the company acquired the Carolina Aseptic and Carolina Dairy businesses at a purchase consideration of USD 118 million. Carolina Aseptic develops, manufactures, packages, and distributes aseptic shelf-stable food products and beverages, while Carolina Dairy produces and distributes refrigerated yogurt in spouted pouches in Biscoe, North Carolina. The above acquisition would enhance the company’s footprints across the aseptic protein beverages and nutritional snacks segments, which looks impressive considering the ongoing performance of the segment.
  

• Innovative product offerings: In order to gain market share, the group is strengthening its existing product portfolio, particularly its core products. Moreover, to cater to the growing demand across the alternative dairy segment, the corporation recently acquired UK-based Bute Island Foods Ltd, which operates in dairy alternative cheese products and caters to retail and foodservice markets through its renowned Sheese brand. Additionally, the company is focusing on offering new value-added ingredients such as goat whey, organic lactose and other dairy powders to its portfolio in order to tap the above segment.

• Focusing on achieving operational efficiency and capacity expansion: The management is looking to improve its existing cost-structures by taking several initiatives within the manufacturing, supply chain and logistics services segments. Within the USA, the company has started enhancing the capacity of its leading string cheese portfolio, which is expected to be completed within the next three fiscal years. Moreover, in Canada, the group has also started implementing several automation projects in order to accelerate its operational goals through improved cost structures. Within Australia, the company is focusing on driving efficiencies by improving its recovery of by-products and aiming to extract the highest value at the lowest cost. The above is expected to maximize yield per unit of milk and subsequently lead to the improved cost management.

• Increase in dividend payment: Despite the sluggish economic scenario, the company distribute higher dividends to its shareholder, which is a key positive. Notably, in H1FY22, the total paid dividend stood at CAD 106 million, significantly higher than CAD 51 million in pcp.
  

• Ample liquidity to support its future requirement: At the end of Q2FY22, the group reported a total cash balance of CAD 222 million and unused credit facilities of CAD 1.751 billion under the bank credit facilities. The management believes that the above consolidated liquidity is sufficient to meet the company’s upcoming working capital requirements and capital expenditures.

• Launch of Nibbl: In order to cater to the growing e-commerce demand, the company launched an innovative B2C platform during September 2021, wherein the group would supply curated specialty cheese boxes across Ontario and Québec regions. Notably, the management is also focusing on expanding its distribution across the other regions of Canada.
  

• Positive technicals: At the daily price chart, the stock of SAP closed above its 13-days and 20-days simple moving averages (SMA), which reflects a bullish signal and possibility of an up move in coming trading sessions.

Technical Price Chart (as on November 12, 2021). Source: REFINITIV, Analysis by Kalkine Group

Q2FY22 Financial Highlights:

• Moderately lower topline: SAP announces its quarterly result, wherein the company posted revenue of CAD 3,689 million, down 0.4% on y-o-y basis. During the second quarter of FY22, the company reported a lower income from the USA geography (CAD 1,533 million v/s CAD 1,649 million in pcp), partially offset by improved performance from the international segment (CAD 858 million v/s CAD 806 million in pcp).

• Slide in profitability: Adjusted EBITDA stood lower at CAD 283 million, as compared to CAD 370 million in the previous corresponding period. The decline was primarily attributed to a rise in input costs such as transportation, fuel, consumables and packaging, due to inflationary pressures. Notably, operating costs stood at CAD 3,406 million, as compared to CAD 3,332 million in pcp.

• Lower net income: Net earnings stood at CAD 98 million, as compared to CAD 171 million in Q2FY21. The decline was primarily due to the above-mentioned reasons, coupled with higher depreciation & amortization costs (CAD 137 million v/s CAD 126 million in pcp).

Q2FY22 Income Statement Highlights (Source: Company Report)

Risks: The group’s income is interrelated with international cheese and dairy ingredient market prices, while price volatility is likely to hamper the company’s profitability and cash flow. Higher input costs coupled with changing consumers preferences could dampen the overall company’s performance.

Top-10 Shareholders

Top ten shareholders of the company together hold approximately 51.45% stake, Jolina Capital, Inc. and Placements Italcan Inc are the major shareholders in the company with an outstanding position of 31.46% and 10.26%, respectively.

Source: Refinitiv 

Valuation Methodology (Illustrative): EV to Sales

Stock Recommendation:

The upcoming third quarter of FY22 is expected to deliver the strongest performance driven by favorable demand dynamics primarily from the USA Markets, which is a key positive. Moreover, the group is aiming to deliver higher single-digit growth in Adjusted EBITDA on a CAGR basis in order to reach its ambitious target of CAD 2.125 billion of Adjusted EBITDA by the end of FY25. Notably, SAP would focus on leveraging the power of its brands, both domestically and internationally, and would optimize its existing product portfolio, particularly its core categories. Last but not the least, recent acquisitions of Bute Island Foods Ltd, and Carolina are expected to reap improved prospects in terms of operational efficiency and organic growth for the company in the coming days. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers Dollarama Inc, Premium Brands Holdings Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of SAP at the last traded price of CAD 30.73 on November 12, 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 November 12, 2021). Source: Kalkine, Analysis by Kalkine Group 

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

*Recommendation is valid on November 15, 2021, price as well.

Disclaimer

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