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. 

Investment Rationale:

• Sign of demand revival: During Q2FY22, the Canadian dairy market showed impressive results supported by higher selling prices due to the elevated cost of raw materials. Notably, in order to mitigate the increasing input costs, the group implemented pricing initiatives during the quarter, which contributed positively across North America and European markets. SAP reported that its domestic market has returned to historical sales volumes mainly within the retail and industrial market segments, and the trend is expected to continue in the coming quarters.

• Prime focus on improved cost structure and capacity expansion: The management is looking to improve its existing cost structures and is adopting key initiatives to minimize its manufacturing, supply chain and logistics services costs. Moreover, in Canada, the group has also started implementing several automation projects in order to accelerate its operational goals through improved cost structures. Notably, 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 improved cost management. Within the USA, the corporation started enhancing the capacity of its leading string cheese portfolio, which is expected to be completed within the next three fiscal years.

• Higher dividend distribution: The group reported a higher dividend payment of CAD 106 million in H1FY22, as compared to CAD 51 million in pcp. The above is impressive, as most of the companies are lowering their dividend distribution in order to retain their liquidity.

• Launch of Nibbl: In order to cater to the growing e-commerce market, Saputo launched an innovative B2C platform during September 2021, wherein it 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.
  

• Technical showing a possible price appreciation: At the daily price chart, the 14-days RSI of SAP has witnessed an uptick and is hovering around 40.33, indicating the possibility of price appreciation in the upcoming trading sessions. Moreover, the stock price is trading near the lower band of Bollinger Band, which indicates that the price can have a positive movement in coming sessions.

Technical Price Chart (as on December 17, 2021). Source: REFINITIV, Analysis by Kalkine Group 

• Expansion through acquisition: Recently, the company acquired 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 yoghurt in spouted pouches across Biscoe, North Carolina. The above acquisition is likely to boost the company’s footprints across the aseptic protein beverages and nutritional snacks segments.

Q2FY22 Financial Highlights:

• Slightly lower topline:  SAP declared its second-quarter result, wherein the group reported 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 a decent performance from its international segment (CAD 858 million v/s CAD 806 million in pcp).

• Subdued profitability: Adjusted EBITDA stood lower at CAD 283 million, as compared to CAD 370 million in the previous corresponding period. The quarter witnessed 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.

• Slide in 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), partially offset by lower income taxes.

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 51.54% 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, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales

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 is strengthening its existing product portfolio, particularly it's core products, in order to cater to a larger consumer, which is a key positive and is expected to support its upcoming sales volumes. In the recent past, the industry is witnessing strong traction within the alternative dairy segment, and hence, SAP has 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. Moreover, the corporation 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. On a CAGR basis, the group expects to attain a higher single-digit growth in its Adjusted EBITDA till FY25. 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 like Canadian Tire Corporation Ltd, Metro Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of SAP at the last traded price of CAD 28.34 on December 17, 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 December 17, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on December 20, 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.