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

Investment Rationale:

• Expansion plans: Within the USA region, the group is expanding its capacity of the leading string cheese portfolio and is expected to be completed within the next three fiscal years. This would lead to grabbing a part of the growing cheese market across North America, which is a key positive. Apart from this, the company has entered into the aseptic beverage & food categories and the nutritional snacks segment through its recent acquisition of Carolina Aseptic and Carolina Dairy businesses in Q2FY22. This would capture the growing market demand for aseptic protein beverages and nutritional snacks.
  

• Focus on improved cost structure: SAP is prioritizing to improve its existing cost structures and has taken key initiatives to minimize its manufacturing, supply chain and logistics services costs. Notably, the group has also started implementing several automation projects to accelerate its operational goals through improved cost structures across Canada. Moreover, within the Australia region, SAP 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.

• Encouraging long-term goal: The company is targeting to grow its Adjusted EBITDA by higher single digit on a CAGR basis during FY22-FY25. This includes higher sales volume growth at greater than 2x the annual growth rate of global per capita dairy consumption across all geographies except Australia. Apart from this, the group is also targeting ~CAD 200 million of cost savings through improved cost management during FY22-FY25, which looks impressive.

• Domestic market recovery: For the H1FY22, the company reported higher revenue of CAD 2,114 million, as compared to CAD 2,045 million in pcp. The growth was supported by pricing initiatives implemented during the period on account of the increased cost of raw material. However, adjusted EBITDA grew to CAD 237 million in H1FY22, as compared to CAD 221 million in pcp, indicating an improved costs management. Notably, the foodservice segment within the Canada region performed well during the period deriving CAD 725 million of revenue in H1FY22, as compared to CAD 607 million in pcp.

• Increase in dividend payment: The company distributed 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.
  

• Introduction of Nibbl: In order to cater to the growing e-commerce market, SAP launched its 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.

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.

Q2FY22 Financial Highlights:

Q2FY22 Income Statement Highlights (Source: Company Report)

• Marginally lower topline:  SAP declared its second-quarter result, wherein the group reported revenue of CAD 3,689 million, as compared to CAD 3,702 million in pcp. During the second quarter of FY22, the company reported a lower income from the retail segment (CAD 1,826 million v/s CAD 1,871 million in pcp), partially offset by decent performances from foodservice and industrial segments.

• Sluggish profitability: Adjusted EBITDA stood lower at CAD 283 million, versus CAD 370 million in Q2FY21. The quarter was marked by 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 earnings: Net earnings stood at CAD 98 million, significantly lower than CAD 171 million in Q2FY21. The decline was primarily due to the above-mentioned reasons, coupled with a rise in the depreciation & amortization costs (CAD 137 million v/s CAD 126 million in pcp), partially offset by lower income taxes and financial charges.

Valuation Methodology (Illustrative): EV to Sales

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Top-10 Shareholders

Top ten shareholders of the company together hold approximately 51.57% stake, Jolina Capital, Inc. and Placements Italcan Inc are the major shareholders in the company with an outstanding position of 31.40% and 10.24%, respectively.

Source: REFINITIV, Analysis by Kalkine Group

Stock Recommendation:

With the recent acquisition of Carolina, the group would expand its presence within the attractive and growing product categories including aseptic formats, nutritional beverages, and dairy snacking segments. Additionally, the company is increasing its value-added products such as goat whey, organic lactose, and other dairy powders, which is expected to diversify the company’s current product portfolio and would support the upcoming margins as well. 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 Metro Inc, Maple Leaf Foods Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of SAP at the closing price of CAD 27.87 on January 28, 2022.

One-Year Technical Price Chart (as on January 28, 2022). Analysis by Kalkine Group

*Recommendation is valid on January 31, 2022, price as well.

 Technical Analysis Summary

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV. 

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer

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