Saputo Inc. (TSX: SAP) produces, markets, and distributes a variety of daily products, which include cheese, fluid milk, shelf-life milk, and cream products. Saputo falls under the top ten dairy processors in the world and is a prime cheese manufacturer, fluid milk and cream processor in Canada. The company’s products are sold in various countries under private label brands and other market leading brands.

Key Highlights

• Favorable outlook:The demand for the company’s products will remain high with the recovery in the retail and industrial market segments and a stable recovery in the foodservice market segment. Additionally, sales from the retail market segment will come back to pre-pandemic levels. The company is highly focused on its Global Strategic Plans to strengthen its position as a high-quality, low-cost processor without compromising productivity and efficiency.

• Optimizing and enhancing operations: Recently, the company revealed its various capital investment plans to intensify its manufacturing footprint in the USA and other international markets. In the USA, the company aims to invest around CAD 169 million in the expansion of its cheese manufacturing facilities in Wisconsin and California. This expansion plan will commence in Q4 FY 2022 and hence, support the company’s vision of expanding in the retail market segment.

• Improved Sales Volume: Despite the challenging market conditions, such as labour shortages, supply chain disruptions, and inflationary pressures, the company managed to improve its sales volume, particularly in the foodservice segment. However, sales volume for the retail market segment dipped as it reached back to its pre-pandemic levels.

• Elevated Dairy Products Prices:The company would generate benefit from the rising international price for cheese and dairy products coupled with higher domestic selling prices. The rising price will favor the company’s top line in coming period.
  

Risks associated with investment

The company’s product selling prices are driven by international cheese and dairy ingredient market prices, while price volatility is likely to hamper the company’s profitability and cash flow. Higher input costs followed by challenging market conditions, including labour shortages, supply chain disruptions, and inflationary pressures, could dampen the overall company’s performance. 

Financial overview of Q3 FY22 (In millions CAD)

Source: Company Filing

• In Q3 FY22, the company’s reported revenues improved slightly to CAD 3,901 million, compared to CAD 3,763 million in pcp, primarily due to higher sales volumes in the foodservice market.
• The quarter was marked by a rise in input costs such as transportation, fuel, consumables, and packaging, due to inflationary pressures. Notably, operating costs stood at CAD 3,579 million, against CAD 3,332 million in pcp. Hence, the Earnings before Income taxes stood lower at CAD 112 million, versus CAD 277 million in Q3FY21.
• Net earnings stood at CAD 86 million, significantly lower than CAD 210 million in Q3FY21. The decline was primarily due to the above-mentioned reasons, coupled with a rise in the depreciation & amortization costs (CAD 144 million v/s CAD 128 million in pcp), partially offset by lower income taxes and financial charges.

Valuation Methodology (Illustrative): EV to EBITDA Based

Analysis by Kalkine Group 

Stock Recommendation

The group's current capital investment initiatives aim to increase its reach in international markets and boost product categories such as nutritious drinks and dairy snacks. Additionally, demand for the company's products is strong, with ongoing strength in the retail and industrial market segments and consistent improvement in the foodservice market sector. Furthermore, the overall supply-demand dynamics of the food service market, especially mozzarella cheese, is expected to improve as inventories revert to historical levels. Nevertheless, the business anticipates inflationary pressures to be somewhat eased in the coming quarter by continuing pricing actions implemented in all geographies since the beginning of fiscal 2022, which will benefit margins.

Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the last closing price of CAD 30.71 as on April 21, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on April 21, 2022). Source: REFINITIV, Analysis by Kalkine Group

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.