Sustained Demand and Innovation Powering Growth: Maple Leaf Foods Inc. (TSX: MFI) is Canada’s leading manufacturer of food products that includes ready-to-cook and serve meals, prepared meat, plant-based protein products and value-added fresh pork and poultry. The firm also has agribusiness operations and operates across Canada, the United States, Mexico, and Japan.

Outlook: For FY20, the Group expects strong demand within retail segment and a decline in the foodservice channel. The Company will continue to offer innovative plant protein products and expects a rise of CAD 20 million in input costs. Temporary shutdown on account of COVID 19 may impact production, while the company estimates its capital expenditures to be CAD 50.0 million lower than the previous guidance of CAD 650 million to CAD 700 million.

Q1FY20 Financial Highlights: MFI announced its quarterly results, wherein the company reported a 12.8% y-o-y growth in its revenues to CAD 1,022 million. The increase was driven by strong volumes in the meat products segments. Further, favorable pricing and mix supported the top line. Also, a double-digit growth in the plant protein group further drove sales higher. Adjusted Operating Earnings stood at CAD 45.1 million, reflecting a 7.3% growth from the previous corresponding quarter. Adjusted EBITDA came in at CAD 90.5 million, as compared to CAD 84.4 million in pcp. The company reported adjusted net earnings of CAD 0.21 per share as compared to CAD 0.20 per share.

Q1FY20 Income Statement Highlights (Source: Company Reports) 

Valuation Methodology (Illustrative): Price/CF based Approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock MFI climbed ~12% during the last six months. Maple Leaf Foods offers prepared meats products in a ready-to-serve format. As people are choosing to stay at home due to the ongoing COVID 19 crisis, the products witnessed a surge in demand from retail customers, supported by increased exports to China and Japan. Further, company’s price restructuring initiatives last year during the third quarter and favorable mix is encouraging. The company’s focus on innovation and strong product pipeline bodes well for growth. Notably, the company’s plant protein group is witnessing stellar demand, which we expect to be a key revenue generator in the long run. Moreover, the company is focusing on lowering costs, which is likely to boost margins. Though near-term challenges persist, including increase in operating costs, but the company remains well-positioned to benefit from sustained demand in the retail segment. We have valued the stock using Price to Cash- flow- based relative valuation and considered Metro Inc (TSX: MRU), Loblaw Companies Ltd(NYSE: L), Dollarama Inc (TSX: DOL) etc. as peer group and arrived at a target price which implies a potential upside in double-digit (in percentage terms). Hence, we recommend a ‘Buy’ on MFI stock at the closing price of CAD 25.73 on April 30, 2020.

MFI One-Year Daily Price Chart (Source: Thomson Reuters)

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