Maple Leaf Foods

Maple Leaf Foods Inc. (TSX: MFI), is a Canadian consumer-packaged meats company who produces prepared meats and meals, fresh pork, and poultry and turkey products. The company sell their products to the markets of Canada, the United States, Mexico, and Japan.

Why Should Investors Book Profit?

• Increasing uncertainties: The resurgence of Delta variant cases has raised a lot of questions, and it might have an influence on the company's operations and cash flows, as the government may tighten some mandatory lockdowns to combat the spread.
• Lower margin profile v/s Industry: In Q3 2021, the company failed on maintaining its pace and witnessed lower performance across operating margin matrix, which exhibits the pressure on company.
• Weak liquidity profile: In Q3 2021, the company's quick ratio was 0.57x compared to the industry median of 0.99x, while the current ratio stood at 1.42x against respected median of 1.87x. These lower ratios against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.
• Weak performance from Plant Protein Group: Sales of the Plant Protein Group fell 6.6% in Q3 2021 compared to pcp, owing to lower retail sales in the category. Furthermore, the Company does not plan to fulfill its sales growth target for the Plant Protein Group in the second half of 2021.
• Long Cash Cycle days: The company is holding higher Cash Cycle (Days) compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 71.5 days compared to an industry median of 43.7 days.
• Exhausted technical indicators: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~75.61 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV/Sales

Stock recommendation

In Q3 2021, the company’s revenue grew by over 13% and Adjusted EBITDA grew by 22%, driven by a 90-bps improvement in margin. Its meat protein business delivered exceptional results; however, Plant Protein Group sales have declined by 6.6% in Q3 2021 compared to pcp, mainly due to declining retail sales within the category. Furthermore, the company's liquidity ratios are on lower side, and its cash cycle days are on the higher side compared to an industry median, indicating a weak liquidity profile. Moreover, the group is witnessing lower margins over industry, reflects the pressure on the company. Additionally, the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 30.94 on November 8, 2021. 

Western Forest Products Inc

Western Forest Products Inc (TSX: WEF) is a Canada-based softwood forest products company. Its principal business activities include timber harvesting, reforestation, forest management, sawmilling logs into lumber and wood chips, and value-added lumber remanufacturing.

Why Investor’s Should Book Profit?

• Decline in lumber prices and supply chain issues: North American commodity lumber prices fell for the majority of the third quarter after reaching record highs in May 2021. Furthermore, due to log supply-related operating curtailments, lumber production fell by 9% to 175 million board feet against Q3 2020.
• Lower margin profile v/s Industry: In Q3 2021, the company witnessed lower performance across operating margin matrix compared to an industry median margin, which exhibits the pressure on company.
• Sequentially degrading operating matrix: The corporation failed to maintain its pace on a sequential basis, resulting in a weaker operational matrix. The company's gross margin, EBITDA margin, operating margin and net margin are all showing signs of weakening, indicating that it is losing its edge.
• Weak liquidity profile: In Q3 2021, the company's quick ratio was 1.22x compared to the industry median of 1.69x, while the current ratio stood at 2.23x against industry median of 2.78x. These lower ratios against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.

Valuation Methodology (Illustrative): EV to Sales    

Stock recommendation

The company recently released its Q3 2021 financial results, which showed healthy revenue and adjusted EBITDA growth when compared to Q3 2020, however the company's sequential performance was not up to par. After reaching record highs in May 2021, North American commodities lumber prices declined for the duration of the third quarter. Furthermore, lumber production declined by 9% to 175 million board feet in Q3 2020 due to log supply-related operating constraints. The company also failed to keep up with the pace in a sequential manner, resulting in a weaker operational matrix margin, showing that the organization is under stress. Furthermore, the company's liquidity ratios are bad, showing that the company's short-term commitments are expanding faster than the company's resources to cover them, which is not a good sign. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 1.92 on November 8, 2021.

One-Year Technical Price Chart (as on November 8, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.