Saputo Inc.

Decent Increase in Revenue and EBITDA: Saputo Inc. (TSX: SAP) is a dairy processor and cheese producer that operates in Canada, the U.S., Argentina, the United Kingdom, and Australia and sells products in more than 50 countries. As on 10 June 2020, the market capitalization of the company stood at ~CAD 13.54 billion.

Yearly Performance (For the Period Ended 31 March 2020): During the year ended 31 March 2020, revenue of the company went up by 10.7% to CAD 14.94 billion and adjusted EBITDA witnessed an increase of 20.2% to CAD 1.46 billion. This was mainly due to the acquisition of dairy crest in the Europe sector. The Specialty Cheese Business Acquisition in the International Sector also contributed positively to revenues and adjusted EBITDA. In the same time span, net earnings of the company stood at CAD 582.8 million and EPS was CAD 1.94. During the year, the company generated CAD 1,036.9 million of net cash from operations, up by 17.2% on the pcp. The Board has approved a dividend of CAD 0.17 per share which is to be paid on 9 July 2020.

FY20 Financial Highlights (Source: Company Reports)

Impact of COVID-19: With the outbreak of the Coronavirus, the company witnessed a shift in consumer demand on a global scale and saw a decline in orders in the foodservice and industrial segments. However, the company is expecting sustained demand in all its geographic markets. Despite the current unprecedented environment, SAP is aiming to achieve profitable long-term growth.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company retains a solid financial position and capital structure, which is supplemented by a high level of cash generated by operations. SAP is well-positioned to grow through targeted acquisitions and organically through strategic capital investments. As per TSX, the stock of SAP is trading close to its 52-weeks’ low level of CAD 29.31, which offers investors a decent opportunity to enter the market. We have valued the stock using EV/Sales multiple based illustrative relative valuation and have arrived at a target upside of lower double-digit (in percentage terms). Considering the current trading levels, decent returns in the past three months, increasing revenue and EBITDA and resilient business despite the global pandemic, we recommend a ‘Buy’ rating on the stock at the Closing market price of CAD 33.15, up by 0.7599% on 10 June 2020.

SAP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Premium Brands Holdings Corporation

Premium Brands Holdings Corporation (TSX: PBH) operates in specialty food manufacturing, premium food distribution and wholesale businesses. The group has a geographical presence in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nevada, and Washington State. The Group operates through two business segments, namely, Specialty Foods and Premium Food Distribution.

The Board announced a quarterly cash dividend of CAD 0.5775 per share, payable on July 15, 2020.

Q1FY20 Financial Highlights: PBH impresses with its first quarter results, wherein the Company reported stellar operating performance driven by strong organic growth. Revenue grew by 20.4% over pcp to CAD 935 million, aided by a tremendous performance from both the segments. The quarter was marked by robust volume growth from sandwiches, meat snacks and premium dry-cured meats segments and a price increase of several items. Adjusted EBITDA stood at CAD 64.3 million, reflecting an increase of 6.6% from the previous corresponding period. Adjusted EBITDA margin slide to 6.9% against 7.8% in the previous corresponding quarter. Selling, general and administrative expenses stood higher at CAD 116.7 million versus CAD 99.3 million in pcp. Net earnings stood CAD 12.2 million, as compared to CAD 10 million in the previous corresponding quarter, aided by higher earnings before income taxes.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The company reported excellent organic growth in the first quarter, amidst a challenging environment, which is impressive. The stock of PBH corrected ~4% so far this year, amidst major volatility across the broader market. Investors should note that the stock is trading above its 50-days and 100-days simple moving average (SMA) of CAD 83.34 and CAD 86.6, indicating a medium-term bullish trend. The group mentioned that COVID-19 pandemic had a slightly positive impact on the company's first-quarter sales and adjusted EBITDA. The group expects the pandemic to have a significantly negative impact on its results for the year, in general, and the second quarter, in particular. Moreover, the company trades at a higher multiple when compared to peers. For instance, PBH stock trades at a forward P/E multiple of 27.5x, as compared to the Food and tobacco industry median of 17.3x. Also, the PBH stock trades at a forward EV/EBITDA multiple of 14.3x as compared to the industry average of 12.5x. Based on the aforementioned reason, we recommend a 'Watch' stance on the stock at the closing market price of CAD 87.20 as on June 10, 2020.

PBH Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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