Saputo Inc. (TSX: SAP) produces, markets, and distributes a variety of daily products, which include cheese, fluid milk, shelf-life milk, and cream products. Saputo falls under the top ten dairy processors in the world and is a prime cheese manufacturer, fluid milk and cream processor in Canada. The company’s products are sold in various countries under private label brands and other market leading brands.

Key Highlights:

• Remarkable Capital Investment Plan: Recently, the company revealed its various capital investment plans to intensify its manufacturing footprint in the USA and other International markets. In the USA, the company aims to invest around CAD 169 million in the expansion of its cheese manufacturing facilities in Wisconsin and California. This expansion plan will commence in Q4 FY 2022 and hence, support the company’s vision of expanding in the retail market segment.
  

• Elevated Dairy Products Prices: The company will generate benefit from the rising international price for cheese and dairy products coupled with higher domestic selling prices. The rising price will favor the company’s top line in coming period.

• Improved Sales Volume: Despite the challenging market conditions, such as labour shortages, supply chain disruptions, and inflationary pressures, the company managed to improve its sales volume, particularly in the foodservice segment. However, sales volume for the retail market segment dipped as it reached back to its pre-pandemic levels.
  

• Focus on reducing cost structure: The company has prioritized curbing its existing cost structures, where it has already started several key initiatives to minimize its manufacturing, supply chain, and logistics service costs. In lieu of this, the group has also started implementing several automation projects to accelerate its operational goals through improved cost structures across Canada.
  

• Outlook: The demand for the company’s products will remain high with the recovery in the retail and industrial market segments and a stable recovery in the foodservice market segment. Additionally, sales from the retail market segment will come back to pre-pandemic levels. The company is highly focused on its Global Strategic Plans to strengthen its position as a high-quality, low-cost processor without compromising productivity and efficiency.
  

Key Risks Associated with Investment:

The company’s product selling prices are driven by international cheese and dairy ingredient market prices, while price volatility is likely to hamper the company’s profitability and cash flow. Higher input costs followed by challenging market conditions, including labour shortages, supply chain disruptions, and inflationary pressures, could dampen the overall company’s performance.

Key Financial Highlights: Q3 FY22 (In millions CAD)

  Source: Company Report

• SAP declared its Q3 FY22, wherein the group reported revenue of CAD 3,901 million, as compared to CAD 3,763 million in pcp.

• 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 3,579 million, as compared to CAD 3,332 million in pcp. Hence, the Earnings before Income taxes stood lower at CAD 112 million, versus CAD 277 million in Q3FY21.

• Net earnings stood at CAD 86 million, significantly lower than CAD 210 million in Q3FY21. The decline was primarily due to the above-mentioned reasons, coupled with a rise in the depreciation & amortization costs (CAD 144 million v/s CAD 128 million in pcp), partially offset by lower income taxes and financial charges.
  

 Valuation Methodology (Illustrative): EV to EBITDA Based

Analysis by Kalkine Group

Stock Recommendation:

With the recent capital investment plans, the group targets expanding its footprint in the international markets and growing product categories, including nutritional beverages, and dairy snacking segments. Additionally, the demand for the company’s products continue to remain elevated, with continued strength in the retail and industrial market segments and a steady improvement in the foodservice market segment. Furthermore, the overall supply-demand dynamics of the food service market, especially mozzarella cheese, is expected to improve as inventories revert to historical levels.

We have valued the stock using the EV to EBITDA based valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Caseys General Stores Inc, Maple Leaf Foods Inc. etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of SAP at the closing price of CAD 30.87 on February 17, 2022.

One-Year Technical Price Chart (as on February 17, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

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