Stocks’ details

Saputo Inc.

Acquisitions and higher pricing fueling growth: Saputo Inc (TO: SAP) is one of the largest producers and marketer of dairy products in the world. Saputo offers a wide variety of dairy products that include cheese, dairy ingredients, fluid milk, cultured products, and extended shelf-life milk and cream products, among others. Despite heightened competitive environment, Saputo has managed to drive profitable growth, thanks to the strategic acquisitions of Dairy Crest Group in the UK and the specialty cheese business of Lion Dairy & Drinks in Australia.

Recent financial performance indicates strength: Saputo posted impressive set of numbers in 3Q19 for the period ended 31 December 2019. The company posted revenues of CAD 3.89 billion, reflecting year-over-year increase of   CAD 313.6 million or 8.8%, as compared to CAD 3.58 billion in the prior-year period. The acquisition of Dairy Crest and the specialty cheese business drove much of this growth. Meanwhile, higher pricing further supported the top line growth. Adjusted EBITDA came in at CAD 417.0 million, implying an increase of CAD 95.8 million or 29.8%, as compared to CAD 321.2 million in the prior-year period. Adjusted net earnings came in at CAD 204.2 million, a year-over-year increase of $29.8 million or 17.1%, as compared to CAD 174.4 million for the same period last fiscal year. Saputo reported adjusted earnings of 50 cents per share compared to earnings of 44 cents per share in the prior-year period. 

3Q19 Financial Highlights (Source: Company Reports)

Cash Flow Details: At the end of the quarter, Saputo’s cash balance stood at CAD 243.3 million, as compared to CAD 112.7 million. Net debt stood at CAD 4.23 billion. Net debt to adjusted EBITDA stood at 2.92.

P/E Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months 

Stock Recommendation: Currently, the stock is trading close to its 52-week low of CAD 37.39 with a market capitalization of ~CAD 16.07 billion. We believe Saputo’s strong financial position and strategic acquisitions bode well for growth. Moreover, business reinvestments and portfolio diversification could continue to support organic growth. Further, favorable pricing environment expansion in the fast-growing plant-based products market is likely to support growth. We have valued Saputo stock using relative valuation method, i.e., P/E based approach. For this, we have taken peers like Maple Leaf Foods Inc (TO: MFI) and Premium Brands Holdings Corp (TO: PBH). Currently, SAP stock is trading at a forward P/E multiple of 20.0x, which is lower than the peer group average. We believe SAP’s P/E multiple to expand in future given its focus on driving efficiency, reducing costs, and strategic investments that are likely to drive profitable growth in the coming quarters. We have taken a target P/E multiple of 25.0x and arrived at a target price with an upside of lower double-digit (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of CAD 39.38, down ~0.9% as on 26 February 2020.

1-Year daily price chart (as on February 26, 2020). Source: Thomson Reuters.

Alimentation Couche-Tard Inc

Strong History of double-digit growth: Alimentation Couche-Tard Inc. (TO: ATD.B) is one of the leading operators of convenience stores across the globe. The company operates its convenience stores chain under several banners, that include Circle K, Couche-Tard, Ingo, and Corner Stone and others with a worldwide network of more than 16,000 stores.

Q2FY20 Financial Highlights for the Period ended 13 October 2019: The company posted revenues of US$ 13.7 billion in the second quarter, reflecting year-over-year decline of about 7%. The decline in road transportation fuel average selling prices and adverse currency rates remained a drag. However, the base business remained strong with organic sales registering healthy growth. Gross profit increased 7.1% year-over-year to US$ 2.3 billion, driven by higher fuel margins and strong organic growth. Adjusted net earnings jumped 22.5% year-over-year to US$ 571 million. Meanwhile, adjusted earnings came in 51 cents per share, up 24.4% year-over-year.

Strong history of beating the broader markets: Overall negative sentiments in the global markets, lower road transportation fuel average selling prices, and adverse currency rates have negatively impacted the shares of Alimentation Couche-Tard in the recent past. However, the ATD.B stock has a strong history of beating the broader markets by a wide margin. Stellar financial performance and strategic acquisitions have helped the company to outperform peers even in the period of economic doldrums.

ATD.B Stock’s Relative Stock Performance: (Source: Company Reports)

ATD.B stock’s outperformance stems from its rock-solid financials. The company’s revenues have grown at a CAGR of 16% in the last nine years. Meanwhile, its EBITDA and adjusted EPS have grown at a CAGR of 22% each during the same period. Besides stock price appreciation, Alimentation Couche-Tard has a strong history of rewarding shareholders through increased dividends. The company’s dividends have grown at a CAGR of 27.8% in the last nine years. The company has a long history of acquiring profitable businesses that have solidified its market position. Since 2004, the company completed 60 deals, which added about 10,200 stores to its kitty globally.

Besides acquisitions, the company also benefits from continued strength in its base business. Its merchandise same-store sales continue to increase across all geographies. Meanwhile, the company’s ability to generate strong cash flows supports its capex and growth plans.

P/E Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Barring near-term challenges, Alimentation Couche-Tard remains well positioned to post double-digit growth. The company’s long history of acquisitions, solid balance sheet, and capacity to invest in business is likely to boost its prospects. We have valued Alimentation Couche-Tard stock using relative valuation method, i.e., P/E based approach. For this, we have taken peers like Loblaw Companies Ltd (TO: L), Empire Company Ltd (TO: EMP.A), North West Company Inc (TO: NWC), and Metro Inc (TO: MRU). Currently, ATD.B stock is trading at a forward P/E multiple of 18.5x, which is higher than the peer group average. However, we believe the company’s premium valuation as compared to peers is warranted given its impressive financial performance and scope for future growth. We believe ATD.B stock’s multiple to expand further in the future. For this, we have taken a target P/E multiple of 20.7x and arrived at a target price with an upside of lower double-digit (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of CAD 42.58, down ~0.8% as on 26 February 2020 with a market ap of ~CAD 47.8 billion.

1-Year daily price chart (as on February 26, 2020). Source: Thomson Reuters.

Dollarama Inc

Expanding stores network and healthy comparable sales growth outlook. But challenges on sourcing front could limit upside: Dollarama Inc (TO. DOL) is a Canada’s dollar store chain. The value retailer offers wide range of consumable products and general merchandise through stores and online. The company sells most of its merchandise at CAD 4.0 or below.

What’ behind the recent pullback in Dollarama stock: Dollarama stock has corrected by about 15% since the beginning of this year. The sharp decline in the recent past is fueled by the spread of the coronavirus in China. Investors wary that the spread of the virus is likely to impact the supply-side of Dollorama’s business.

Q3FY20 Financial Highlights for the Period ended 3 November 2019: Dollarama continues to appeal to the value-driven shoppers. Dollarama’s revenues increase by 9.6% year-over-year to CAD 947.6 million, as compared to CAD 864.3 million. Balanced growth in comparable sales or comps and benefits from new stores opened drove the top line growth. Comps increased by 5.3%, reflecting higher transactions and ticket size. EBITDA increased 4.3% year-over-year to CAD 273.2 million in the prior-year period. Net earnings increased to CAD 138.6 million, as compared to CAD 132.1 million in the prior-year period. The company posted earnings of 44 cents per share compared to 40 cents per share in the prior-year period.

3Q19 Financial Highlights (Source: Company Reports)

Stock Recommendation: Currently, the stock is trading near to its 52-week low of CAD 33.00 with a market capitalization of ~CAD 11.8 billion. We believe Dollarama’s stores expansion and unique value proposition is likely to support growth. Further, the company’s acquisition of a 50.1% interest in Dollarcity presents yet another growth avenue.  However, supply-side concerns could continue to limit the upside in stock, at least, in the near-term. Notably, Dollarama relies heavily on imported goods, the majority of which is imported from China. We place a “Watch” stance on the stock until the situation improves in China. The stock was trading at CAD 38.00, down ~0.3% on 26 February 2020.

1-Year daily price chart (as on February 26, 2020). Source: Thomson Reuters.

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.