Saputo Inc. (TSX: SAP) is a global dairy processor domiciled in Canada with operations in the United States (43%), the U.K. (6%), and other international markets (22%). It sells cheese, cream, fluid milk, and other dairy products.

Key highlights

• Increase in Revenue: Company maintained its revenue growth, which is CAD 7.177 billion, up CAD 84 million or 1.2%, for six months period FY22 as compared to CAD 7.093 billion for the same prior period. Also posted increased Q2 FY22 revenue numbers, this shows an upward movement of revenue in coming quarters. Overall, sales volumes were higher, mainly due to an increase in the foodservice market segment.

• Company Strategy and Focus: Company has brought new Global Strategic Plan to accelerate its organic growth over the next four years. This plan is designed to deliver results and is complementary to its growth through acquisitions strategy. Company has published in its report and committed to reach Adjusted EBITDA to CAD 2.125 billion by the end of 2025. It has shifted its focus to organic growth and capital expenditure for next few years.

• Overcoming Challenging Market Conditions: The Company has published revenue for the second quarter ended on September 2022, which stood at CAD 3,689 million vs CAD 3,702 million in September 2021, decrease in revenue is due to shortage of labour, supply chain disruptions and inflationary pressures. However, company is combating these challenges by growing sales volumes, strengthening core business, and accelerating product innovation.

Source: Company Filings, Analysis by Kalkine Group 

Risks associated with investment           

Since, the company competes in a highly competitive market, it must adapt to and compete with Input costs, Labour Challenges, inflationary pressures, fluctuation in dairy commodity prices, industry scenario, and client preferences to stay afloat. This could result in significant input costs, which could adversely impact its profit margins.

Financial overview of Q2 FY 2022 (In CAD millions of, except per share amounts)

Source: Company Filings 

• In Q2 FY 2022, the revenue of the company is little down by 0.35% % to CAD 3,689 million as compared to previous comparable period. However, the Canada Sector, its most balanced platform from a market segmentation standpoint, continued to show improved results. In the International Sector, container shortages and port inefficiencies, continued to negatively impact results.
  

• The fluctuation of foreign currencies, most particularly the US dollar, versus the Canadian dollar had an unfavorable impact of CAD143 million.
  

• Net earnings for the second quarter of fiscal 2022 is CAD 98 million, down by CAD 73 million or 42.7%, as compared to CAD 171 million for the same quarter last fiscal year. In the first six months of fiscal 2022, net earnings were CAD151 million, down by CAD 162 million or 51.8%, as compared to CAD 313 million for the same period last fiscal year. These decreases were mainly due to the aforementioned factors.
  

• Net cash generated from operating activities for the second quarter amounted to CAD264 million, in comparison to CAD375 million for the same quarter last fiscal year, due to a decrease in adjusted EBITDA of CAD87 million, a decrease of CAD36 million in non-cash foreign exchange gain on debt and from changes in non-cash operating working capital of CAD15 million.
  

 Valuation Methodology (Illustrative) EV to Sales Based

Analysis by Kalkine Group

Stock recommendation

The company is targeting high single-digit Adjusted EBITDA growth over the four-year period to reach CAD2.125 billion by the end of fiscal 2025. This represents a total increase of CAD 650 million over the four-year period, or approximately 44%, compared to our fiscal 2021 performance. The three main areas which are expected to deliver this growth are growing sales volumes, strengthening core business, accelerating product innovation, to Increase the value of company’s ingredient’s portfolio. Additionally, Company remains very bullish about its organic Global Strategic Plan.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 28.50 on 31 December 2021. 

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

Technical Summary Analysis

One-Year Price Chart (as on December 31, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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