Saputo Inc.

Saputo Inc. (TSX: SAP) is engaged in the manufacturing and production of dairy and cheese products and operates across Canada, the U.S., Argentina, the United Kingdom, and Australia. The company ranks among the top cheese producers across the U.S. and Canada and derives the majority of the revenue from these Geographies. The group operates through its brands like Saputo, Armstrong, Frigo, and Stella.

Q1FY21 Financial Highlights: SAP declared its quarterly results, wherein the company reported revenues of CAD 3.391 billion, reflecting a fall of 7.6% on y-o-y basis. The quarter was marked by a higher sales volume, primarily in the fluid milk category across Canada while the USA geography saw a dip in the sales volumes, which affected efficiencies and the absorption of fixed costs. Within the company’s international segment, increased milk availability in Australia due to acquisitions along with a surge in retail market segment sales volumes within the Europe Sector benefited the overall operations. Adjusted EBITDA stood at CAD 366.5 million, depicting a growth of 2.4% on y-o-y basis. Apart from the above factors, the growth was supported by acquisitions of Dairy Crest and Specialty Cheese Business, which resulted in the surge in retail sales volumes. However, restrictions on the non-essential business travel and promotional activity due to COVID 19 pandemic acted as a drag to the adjusted EBITDA, as the company encountered higher operational costs and unproductive labor costs during the quarter. The company reported net earnings of CAD 141.9 million higher than CAD 121.4 million in the previous corresponding quarter.

Q1FY21 Income Statement Highlights (Source: Company Reports)

Risks: The food-service segment might witness headwinds due to travel restriction and suspension of operations of several restaurants, which might hinder the overall demand of the company’s products.

Valuation Methodology: Price to Earnings Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock corrected ~17% so far this year amid volatility in the market. The group is a leading producer of milk and milk products across the USA and Canada and enhancing its business presence through acquisition, which augurs well for sales volume. The sales volumes within the retail market segment witnessed a decent growth amidst setback across the foodservice and industrial market segments, which is a key positive. Further, demand improvement across the European market has rendered a room for growth for the business. The Management remains positive on the company’s dairy product segment and intends to diversify its product portfolio by pursuing plant-based opportunities in the coming days. Due to a decrease in the long-term debt component, the company reported a slide in the interest expense by CAD 8.5 million, which is encouraging. We expect the Company would be benefitted from elevated demand from the retail segment coupled with the gradual reopening of the foodservice industry. The Company continued to distribute quarterly dividend which shows the financial strength of the group. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered peers like Hershey Co, Metro Inc etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 33.24 on September 23, 2020.

SAP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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