High Liner Foods Incorporated (TSX: HLF), is a Canada-based company, engaged in the processing and marketing of frozen seafood products. The Company produces a range of products from breaded and battered items to seafood entrees, which are sold to North American food retailers and foodservice distributors.

Key Highlights

• Trying to capitalize the market share: As the industry sees the addition of over half a million new customers in the frozen seafood category in 2020, frozen seafood is becoming fastest growing section of the frozen food aisle. The management feels that they are ready to seize the opportunity to expand its value-added business, capitalizing its market leadership in Canada along with growth in the U.S market.

• Increase in dividend: On September 15, 2020, the Company paid a quarterly dividend of CAD 0.050 per share and on November 6, 2020, the Company approved a quarterly dividend of CAD 0.070 per share, payable on December 15, 2020, with a record date of December 1, 2020. This represents a 40.0% increase over the third quarter of 2020. Increasing dividend in a challenging operating environment shows the financial flexibility of the group. 

• Reduced Net debts: The company brought down its Net Debt level by USD 26.3 million to USD 286.0 million compared to USD 312.3 million in the previous corresponding period.

Financial Overview of Q3 2020

Source: Company

• The Company reported a decline in the sales volume by 5.5 million pounds, or 9.1%, to 54.7 million pounds in Q3 2020, compared to 60.2 million pounds in the previous corresponding period, due to the impact of COVID-19 on company’s foodservice customers.
• Sales decreased by USD 25.5 million, or 11.6%, to USD 194.6 million compared to USD 220.1 million, reflecting the lower sales volumes and changes in sales mix.
• In Q3 2020 Gross profit decreased by USD 3.5 million, or 8.3%, to USD 38.9 million compared to USD 42.4 million in pcp; however gross profit as a percentage of sales increased to 20.0% compared to 19.3% in the same period.
• On the back of a decrease in distribution expenses and SG&A expenses the company witnessed an increase in Adjusted EBITDA in Q3 2020 by USD 2.6 million, or 15.8%, to USD 19.1 million compared to USD 16.5 million in pcp. And as a percentage of sales, Adjusted EBITDA increased to 9.8% compared to 7.5%.
• The Company reported an increase in Net income by USD 6.2 million to USD 3.8 million compared to a net loss of USD 2.4 million in the previous corresponding period.  

Risk associated with investment

The performance of the company’s business is prone to several risks which affect income and liquidity. The company is exposed to risks related to resource supply, food processing, suppliers, customers, competition, and foreign exchange exposure are all beyond the management control. 

Stock recommendation

The Company experienced a surge in demand from its retail customers, as trends shifted toward eating at home because of social distancing restrictions. The Company's all three plants increased production lines and have been operating at planned capacity throughout the third quarter to meet the increasing demand in the Company's retail businesses. In contrast, the institutional customers, such as health care facilities, provided a stable demand. We expect increased demand from the foodservice segment, especially restaurants as the governments across the state eased the COVID-19 related restrictions. The Company is also eying to seize the opportunity to expand its value-added business, capitalizing its market leadership in Canada along with growth in the U.S market. On the valuation front, the stock is available at a forward EV/SALES multiple of 0.6x, which is lower than the industry (Food and Tobacco) median of 1.8x. Hence considering the facts mentioned above, we recommend a “Hold” rating at the closing price of CAD 11.08 on December 7, 2020.

Source: Refinitiv (Thomson Reuters)

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