Saputo Inc.

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

Key Highlights:

• Strategic Acquisitions to enhance product presence: In the recent past, the dairy and cheese industry witnessed a shift in consumer preference. Hence, in order to cater to the changing demand dynamics, the group acquired Bute Island Foods Ltd., an innovative manufacturer, marketer and distributor of cheese and related products. The company serves both the retail and foodservice market segments and has vegan Sheesebrand under its portfolio alongside the private label brands. The above company is located at the West Coast of Scotland and is expected to boost the company’s presence across the region. Moreover, the group has acquired the Reedsburg facility of Wisconsin Specialty Protein, LLC., which manufactures value-added ingredients such as goat whey, organic lactose and other dairy powders. This is expected to enhance the company’s offerings, which is a key positive.

• Decline in Total Debt and cost efficiencies amidst economic turbulence: The company reported a lower total debt at CAD 3,303.4 million in FY21, reflecting a decline of ~19% from FY20. This is encouraging as a lower total debt is a healthy sign and improves financial flexibility. The company has showcased prudent capital management by reducing its debt and has also focused on improving its cost structures primarily across the manufacturing, supply chain and logistics activities to support the overall operational efficiencies.
  

FY21 Financial Highlights:

• SAP announces its full-year result, wherein the company posted revenue of CAD 14,293.9 million, slightly lower than CAD 14,943.5 million in FY20. A decline of 4.3% on y-o-y basis was primarily due to a shift in consumer demand relative to the COVID-19 pandemic, partially offset by added revenue from the acquisitions of Lion Dairy & Drinks Pty Ltd and Dairy Crest Group plc.
• Adjusted EBITDA stood flat at CAD 1,470.9 million, as compared to CAD 1,467.8 million in the previous year. The period was marked by improved performance from the USA Market, which resulted in an adjusted EBITDA growth of CAD 57 million. On the flip side, a slide in international cheese and dairy ingredient market prices partially impacted the profitability.
• Net earnings stood at CAD 625.6 million, improved from CAD 582.8 million in FY20.

FY21 Income Statement Highlights (Source: Company Report)

Risks: The group’s income is related to international cheese and dairy ingredient market prices, and price volatility would affect the company’s profitability and cash flow. Increase in input costs coupled with changing consumers preferences are likely affect the company’s performance.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The company is a low-cost processor of dairy products and has a decent market share across North America. The company is planning to enhance its presence across the international markets, which have potential demand for its products. Through its recent strategic acquisitions, SAP is targeting to cater for the growing consumer base for several value-added dairy products, which is likely to support the company’s margins. For FY21, the management expects the industrial market segment to recover during the second half of the financial year, while the retail segment is anticipated to perform well and would sustain above pre-pandemic levels. We have valued the stock using the 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 Metro Inc, Premium Brands Holdings Corp and Jamieson Wellness Inc as a peer group. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of SAP at the closing market price of CAD 36.60 on June 08, 2021.

One-Year Technical Price Chart (as on June 08, 2021). Analysis by Kalkine Group

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

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