Saputo Inc.

Saputo Inc. (TSX: SAP) is a dairy processor and cheese producer which has a presence across Canada, the U.S., Argentina, the United Kingdom, and Australia and sells products across more than fifty countries. 

Key Highlights:

• Focused on enhanced profitability through innovative product offerings: The company is focusing on strengthening its performance by optimizing its existing product portfolio with a primary focus on core categories. The company is enhancing its presence across the alternative dairy portfolio with new formats, flavours and packaging. The company acquired UK-based Bute Island Foods Ltd, which operates in dairy alternative cheese products and caters to both the retail and foodservice market segments through its leading brand Sheese brand. The group also acquired the Reedsburg facility, in order to broaden and increase its presence within the ingredients offering across the USA and international markets. The company expects to offer new value-added ingredients such as goat whey, organic lactose and other dairy powders to its customers. The management is targeting higher single-digit CAGR in adjusted EBITDA till 2025 to CAD 2.125 billion, reflecting a growth of 44% from FY21.

• Ample Liquidity: At the end of Q1FY22, the company reported its cash and cash equivalent of CAD 156 million, while its bank credit facilities were recorded at CAD 1.841 billion. We believe that the above is sufficient to fulfil the company’s short term and long-term capital requirements.

• Capacity addition through Port Coquitlam facility: The company is increasing its capacity within the alternative beverage segment through its Port Coquitlam, BC facility, which is expected to be operational at the end of August 2021. The company is focusing on transferring its production methodologies, and its staff from specific neighboring facilities to the Port Coquitlam plant, which would subsequently reduce the duplication of costs, and the benefits would be reflected during the second half of FY22.

Q1FY22 Financial Highlights:

• SAP announces its quarterly result, wherein the company posted revenue of CAD 3,488 million, improved from CAD 3,391 million in Q1FY21. The increase was driven by a stupendous performance from the food service segment (CAD 1,128 million v/s CAD 901 million in pcp), partially offset by lower retail revenues (CAD 1,741 million v/s 1,882 million in pcp).
• Adjusted EBITDA stood lower at CAD 290 million, as compared to CAD 367 million in the previous year. The decline was primarily attributed lower profitability from the USA and International geographies.
• Net earnings stood at CAD 53 million, as compared to CAD 142 million in Q1FY21.

Q1FY22 Income Statement highlights (Source: Company Report)

Risks: The group’s income is interrelated with international cheese and dairy ingredient market prices, while price volatility is likely to hamper the company’s profitability and cash flow. Increase input costs coupled with changing consumers preferences are likely to dampen the overall company’s performance.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

In order to boost the margins, the company took specific operations-focused initiatives in the manufacturing, supply chain and logistics activities, which looks promising. For instance, the company already commenced its initial phase in the cheese network optimization plan within USA, and also enhancing the production of its market-leading string cheese portfolio. The company’s Dairy Division in UK actively working to diversify the company’s existing products within the dairy ingredient and expects the benefits to contribute to the company’s growth from the second half of FY22. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers Alimentation Couche-Tard Inc, Premium Brands Holdings Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 36.41 on August 09, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on August 09, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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.