Maple Leaf Foods Inc.

Maple Leaf Foods Inc (TSX: MFI) is a consumer -packaged meats company, originally from Canada. The company produces prepared meats and meals, fresh pork, and poultry and turkey products. The firm also has agribusiness operations. These operations supply livestock to the meat products business operations. The Company's primary markets are Canada, the United States, Mexico, and Japan. 

The group has temporarily suspended pork exports to China on a voluntary basis due to recent protocols adopted by the Chinese government for Canadian processors. The protocol requires any plant reporting a COVID-19 positive case to suspend exports to China temporarily. The group believes this is a short-term situation and not a material financial event, given the diversity of the Company's markets.

Q2FY20 Financial Highlights: Maple impreses with its quarterly results, wherein the Company posted its sales at CAD 1,094.574 million, reflecting a growth of 7% from the previous corresponding period (pcp). The increase in the top-line was primarily driven by an increase in hog volumes, favourable mix from growth in sustainable meats, exports to Asian markets and the positive impact of foreign currency translation. The group’s sales also benefited from pricing action taken in the third quarter of FY19. Gross profit, during the quarter, stood significantly higher at CAD 167.314 million, as compared to CAD 110.976 million in pcp, driven by higher top-line growth. Earnings before interest and income taxes soared at CAD 45.255 million from CAD 1.703 million in Q2FY19, thanks to higher earnings combined with the decline in the other expense. Interest expense and other financing costs declined to CAD 8.068 million, against CAD 9.078 million in Q2FY19. Maple reported net earnings of CAD 25.659 million, as compared to a net loss of CAD 6.342 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: For the upcoming quarters, the Company might witness price volatility in the pork and poultry segment. Further, the group is exposed to currency fluctuation risk.

Valuation Methodology: Price/Earnings Based (Illustrative)

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

Stock Recommendation: The stock of MFI corrected ~3% so far this year. The plant-based cheese segment has witnessed solid growth in recent years and has a future potential of CAD 1.69 billion, and we believe the above segment is likely to contribute for the company’s growth in the coming years. In the recent past, the company took preventive measures and lowered its discretionary spending through lowering its SG&A, resulting in a net impact of ~CAD 11.0 million to total Company Adjusted EBITDA, which is impressive. The company is in the process of developing its poultry facility in London, Ontario, which is a key positive. The company has expanded its footprints across Asia, which is key positives. The company expects the momentum to continue within the coming quarters and expects Meat Protein Group income to grow at mid-to-high single digit, which is encouraging. The company expect the margin expansion to continue in the coming quarters, aided by favorable product mix. The company is focusing on increase its advertisement and promotion activities in order to cater to a larger audience, which augers well for the top-line growth. Further, the company expects plant protein group revenue to record an annual growth of ~30% in 2020 and expect gross margin to remain consistent at FY19 level. We have valued the stock using the P/E based relative valuation approach and arrived at a target price, which suggests a high double-digit upside side potential (in % terms). For the said purpose, we have considered industry (Food & Tobacco) average on NTM basis. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 25.13 on October 08, 2020.

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

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