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

Key Updates:

• Revival in Demand: For 9MFY22, the company reported a revenue increase due to higher international cheese and dairy ingredient market prices and higher domestic selling prices. This was supported by an increase demand from the foodservice market segment. Moreover, pricing initiatives implemented across all the sectors to mitigate increasing input costs also supported the growth. Notably, revenues stood at CAD 11.0 billion in 9MFY22, up CAD 222 million or 2.0% from CAD 10.8 billion. This shows a demand revival and is a key positive.

• Increase in dividend payment: The company distributed a higher dividend payment of CAD 159 million in 9MFY22, as compared to CAD 103 million in pcp, backed by stable cash flow generation. This is impressive, as most of the companies are lowering their dividend distribution in order to retain their liquidity.
  

• Expansion Plans: Within the USA, the Company plans to invest ~CAD 169 million towards the modernization and expansion of its cheese manufacturing facilities in Wisconsin and California and to support its growth plan in the retail market segment. The company has started these initiatives from the fourth quarter of fiscal 2022 and are expected to take ~24 months to implement. Within the International Sector, the Company will be streamlining operations in two of its manufacturing facilities in Australia. These measures are expected to contribute to the meaningful growth in the company’s operations.
  

 Q3FY22 Financial Highlights:

 Q3FY22 Income Statement Highlights (Source: Company Report)

• SAP announces its third quarter results, wherein the company posted revenue of CAD 3,901 million, improved from CAD 3,763 million in pcp. The growth was primarily driven by higher revenue from Canada and international markets.
• Total operating costs stood higher than CAD 3,579 million in Q3FY22 v/s CAD 3,332 million in pcp, due to increase in input costs, including overtime wages, transportation, fuel, consumables, and packaging. On the flip side a lower depreciation and amortization partially supported the profitability. Earnings before income taxes stood at CAD 112 million, as compared to CAD 277 million in pcp.
• The company reported a slide in net profit at CAD 86 million v/s CAD 210 million in pcp, due to lower earnings before income taxes, partially offset by lower income taxes.

Risks associated with the investments:

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. Higher input costs coupled with changing consumers preferences could dampen the overall company’s performance. 

Valuation Methodology (Illustrative): Price to Earnings based

Analysis By Kaline Group

Stock Recommendation:

Overall, the retail market segment continues to perform well, and we expect the company’s sales to keep in pace with the pre-pandemic levels. This is likely to contribute to the overall volumes and income in the coming days. We expect the demand for the products to remain elevated, with continued strength in the retail and industrial market segments and a steady improvement in the foodservice market segment.

We have valued the stock using 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 like Metro Inc, Aritzia Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of SAP at the last closing price of CAD 25.08 on May 26, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 26, 2022). Analysis by Kalkine Group

The reference data has been partly sourced from REFINITV 

 Technical Analysis Summary

Disclaimer

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