Lassonde Industries Inc (TSX: LAS.A) operates as a developer, manufacturer, and distributor of ready-to-drink fruit and vegetable juices and drinks. Apart from these, the group is also a producer of store brand shelf-stable fruit juices and drinks in the United States, along with a principal producer of cranberry sauces.

Investment highlights

• Steady orange concentrate prices: Despite the supply chain crisis, management stated that the price of orange concentrate has reverted to the prior equivalent period's levels. Given the ongoing supply chain issue, the reduction was mostly attributable to one of the top suppliers maintaining solid control of its supply chain. As a result of the foregoing, decreased raw material prices are expected to boost the company's margin in the following quarters.

• Constant reduction in total debt: The company reported a constant reduction in its total debt, which indicates prudent capital management. Reduction in debt enhances the financial flexibility of the firm, which is a key positive. Notably, at the end of Q3FY21, the company reported its total debt of CAD 182.5 million, which is the lowest in the last five quarters. Also, its debt-to-equity ratio stood at 0.23x in Q3 2021, lower than the industry median of 0.54x.

Source: REFINITIV, Analysis by Kalkine Group

• Regular Dividend Payment: The Company has an excellent track record of dividend distribution reflecting resilience and healthy cash flow generation. Recently it paid a quarterly dividend of CAD 0.88 per share, on December 15, 2021. Additionally at the last trading price of CAD 145.99, the stock is carrying a decent dividend yield of 2.411%, considering the current macros and interest rates.
  

Financial overview of Q3 2021 (in thousands of CAD)

Source: Company Filing

• A announced its third-quarter results, wherein it posted CAD 469.2 million of revenue, which fell from CAD 495.2 million, compared against the previous corresponding period (pcp). This decrease was largely due to decrease in sales of private label products in the United States as certain plants witnessed a slower production due to labor scarcity, partly offset by a higher sales volume of national brands in the United States.
• Operating profit stood at CAD 25.4 million, against CAD 40.0 million in Q3 2020. The period was marked by a lower cost of sales and a slide in Selling and administrative expense.
• The company reported a drastic fall in the finance expense due to a decline in the total debt, which stood at CAD 2.5 million compared to CAD 4.0 million in the previous corresponding period.
• The company posted its net profit at CAD 17.1 million, lower than CAD 26.3 million, a year ago.
  

Risks associated with investment

The group is witnessing a rise in several input costs like transportation and logistics costs, warehouse costs and certain rise in specific raw material costs. Continuation of the above trend might pose a threat to the company’s margins and cash flows. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

While demand for the company's products remains high, the company is experiencing labor and supply difficulties, as well as a lack of raw materials. The combination of these problems has hindered productivity and reduced the company's capacity to meet demand completely. Inflationary pressures are hurting transportation expenses as well as the cost of inputs, just as they are for other companies in the industry. However, the Company anticipates that it will be able to sustain a sales level that is close to that of fiscal 2020 in fiscal 2021. A crucial plus is that the company is constantly reducing its total debt, which improves its financial flexibility. In addition, the Company is changing its selling prices to mitigate the overall impact of these inflationary pressures, which could give some safety cushion. Therefore, based on the above rationale and valuation methodology, we have given a "Buy" rating at the closing price of CAD 145.99 as on December 20, 2021. We have considered Rogers Sugar Inc, High Liner Foods Inc, Calavo Growers Inc., etc as the peer group for the comparison.

*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 December 20, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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