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. The company sells its products across more than fifty countries. 

Key Highlights:

• A decline in total debt: At the end of Q1FY22, the company reported a lower debt of CAD 4,164 million, which is significantly lower than CAD 4,460 million in pcp. A decline in debt is a key positive as it improves the overall financial flexibility. Moreover, the above would further lead to lower finance costs and would support the profitability.
• Recent acquisition to boost upcoming performance: Recently, the company acquired Carolina Aseptic and Carolina Dairy businesses at a purchase consideration of USD 118 million. Carolina Aseptic develops, manufactures, packages, and distributes aseptic shelf-stable food products and beverages, while Carolina Dairy produces and distributes refrigerated yogurt in spouted pouches in Biscoe, North Carolina. These acquisitions would enhance the company’s footprints across the aseptic protein beverages and nutritional snacks segments.
• Innovative product offerings lead to improved prospects: In order to gain market share, the group is strengthening its existing product portfolio with a primary focus on its core categories. The company is focusing on increasing its presence within the alternative dairy segment, which is gaining higher traction in recent days, due to elevated demand. Notably, the company acquired UK-based Bute Island Foods Ltd, which operates in dairy alternative cheese products and caters to retail and foodservice markets through its renowned Sheese brand. Additionally, the company is focusing to offer new value-added ingredients such as goat whey, organic lactose and other dairy powders to its portfolio in order to tap the above segment.

Q1FY22 Financial Highlights:

• SAP announces its quarterly result, wherein the company posted revenue of CAD 3,488 million, which 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 to 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 Highlight (Source: Company Reports)

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

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

At the end of Q1FY22, the company reported cash and cash equivalent balance of CAD 156 million, while its bank credit facilities were recorded at CAD 1.841 billion. The current liquidity level seems to be sufficient to meet the short term and long-term capital requirements. 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 Dollarama Inc, Premium Brands Holdings Corp and Jamieson Wellness Inc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 31.81 on October 07, 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 October 07, 2021). Source: Kalkine, Analysis by Kalkine Group

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

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