Maple Leaf Foods Inc.

Maple Leaf Foods Inc. (TSX: MFI), is a Canadian consumer-packaged meats company that 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.

Key highlights

• Increased Free cash flows: The company generated CAD 135.2 million of cash from operating activities in Q3 2020, as against CAD 97.7 million in the previous corresponding period. The improvement was primarily due to higher earning. This resulted in an increase in free cash flows by CAD 22 million to CAD 60 million in Q3 2020.

• Improvement in Adjusted EBITDA Margin: In Meat Protein Group, the company posted an Adjusted EBITDA Margin of 12.1% in Q3 2020, compared to 9.0% in Q3 2019. The management is targeting to expand Adjusted EBITDA Margin in a range of 14.0%-16.0%, by the year 2022.

• Capital expenditure:The company has estimated that its total capital expenditures for the year will be between CAD 450 million to CAD 500 million, and Construction Capital will comprise around 70% of this spend. The portion of the Construction Capital will be related to the London, Ontario poultry facility, as well as other projects to enhance the capacity and efficiency improvements further.

• Rise in dividend distribution:The company approved a quarterly dividend of CAD 0.16 per share and CAD 0.64 per share on an annual basis. The annual dividend rose by 10.3% as compared to CAD 0.58 in FY2019. The dividend will be paid on December 31, 2020, to shareholders with a record date of December 7, 2020. 

Financial overview of Q3 2020

Source: company

• The company posted decent numbers in Q3 2020. Sales registered in this period stood at CAD 1.05 billion, increased by 6.2% compared to CAD 995.8 million in Q3 2019. The growth is mainly driven by Meat Protein Group, primarily due to increased demand in the retail channel in North America. Sales also benefited from strong growth in sustainable meats, exports to Asian markets and the positive impact of foreign currency translation.

• In Q3 2020, the company managed to bring down its COGS by almost 3% to CAD 829 million against CAD 856 million in Q3 2019. This helped the group to post healthy gross profits which increased by CAD 88.4 million to CAD 228 million as against CAD 139.7 million.

• Net earnings posted by the company in Q3 2020 stood at CAD 66.0 million, an increase of CAD 52.6 million, compared to CAD 13.4 million in Q3 2019. 

Risks associated with investment

The performance of the company’s business is prone to several risks which affect income, liquidity, risks related to resource supply, suppliers, customers, competition, and foreign exchange exposure. COVID-19 is directly impacting the company as the Gross costs associated with COVID-19 was approximately CAD 19 million in this quarter, we believe that if the restrictions prevail, the operations of the company can suffer.

Valuation Methodology (Illustrative): EV to Sales 

All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation 

The company is focused on improving its Adjusted EBITDA margins of the meat protein segment from 12% to between 14-16%, which is also their bread and butter segment. The group is also investing in London, Ontario poultry facility, as well as other projects to enhance the capacity and efficiency improvements further. The company increased annual dividend from CAD 0.58 to CAD 0.64 and an increase in their free cash flow gives a cushion to business operations. Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 26.49 on 1 December 2020. We have considered Canadian Tire Corporation Ltd, Alimentation Couche-Tard Inc, Metro Inc etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Evertz Technologies Limited

Evertz Technologies Limited (TSX: ET) offers software, equipment, and technical assistance and produces, markets video & audio infrastructure solutions for the television, telecommunications, and media segments.

Key Highlights:

• Positive Guidance: The Company witnessed a slowdown in the activities on account of sluggish demand dynamics driven by COVID 19 pandemic. However, the company believes that the current slowdown is temporary in nature and an economic revival within the IP and Cloud-based solutions is long overdue. We expect a revival in demand would support the company’s order book and future cash flows. Despite the ongoing uncertainty in the economy, the company is continuing its investments across Research & Development.
• Stable top-line: The company reported a stable top-line growth during the last five years, which is a key positive. We expect that the same trend to continue in the coming days, driven by a revival in the order book and an increase in R&D expenses.

Source: Company Presentation 

Q1FY21 Financial Highlights:

• ET reported revenue of CAD 56.337 million, down from CAD 103.411 million in the previous corresponding period (pcp). The decline was primarily attributed by widespread customer shutdowns, travel restrictions and projects on hold or cancelled on account of COVID 19 pandemic. The group reported 51% on y-o-y decline in income from the US segment, while the international segment posted a decline of 31% on y-o-y basis.
• Gross margin stood lower at CAD 32.224 million, as compared to CAD 59.152 million in Q1FY20, due to lower revenue, partially offset by lower cost of goods sold.
• The company reported a lower total expense at CAD 31.289 million, versus CAD 41.423 million in Q21FY20. Earnings before income taxes stood at CAD 0.785 million, as compared to CAD 17.758 million in pcp.
• Net earnings stood at CAD 0.575 million, as compared to CAD 13.207 million in Q1FY20.
• ET reported cash and a cash equivalent of CAD 102.035 million, while total assets stood at CAD 443.668 million.

Q1FY21 Income Statement Highlights (Source: Company Reports)

Risks: Prolong delay in the project execution may lead to a slide in revenue followed by a lower cash flow. Travel ban and cancellation of sports in the recent past has led to a fall in the order book of the company. Continuation of such a trend would affect the group’s performance.

Valuation Methodology (Illustrative): Price to Earnings

(Note: All forecasted figures and peers have been taken from Thomson Reuters). 

Stock Recommendation:

The stock corrected ~28% so far this year due to a tepid scenario on account of COVID 19 pandemic. The company caters to the IT segment and offers innovative offerings across software, equipment, and technology segments. Furthermore, the IT and cloud business has grown drastically in the recent past and is expected to retain the momentum driven by a shift in business, changing consumer preferences etc. We have valued the stock using P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Evs Broadcast Equipment SA, Vecima Networks Inc etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 12.96 on December 1, 2020.

ET Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Domtar Corporation

Domtar Corporation (TSX: UFS) manufactures and distributes a variety of fiber-based products and operates through two reportable segments, namely pulp and paper and personal care.

Key Highlights:

• Positive Outlook: The company expects a gradual recovery in sales volumes from the pulp segment in the coming quarters driven by better demand dynamics, maintenance outages and restocking in China. Moreover, the group reported added traction within the Personal Care segment and continuation of new client addition. Last but not least, the company expects a stable raw material price, which is likely to support the margins as well.

• Cost Savings Strategies to support overall performance: The company reported several cost savings initiatives, including the closure of production facilities, coupled with the benefit from flow-through of improved volume, which is a key positive. Moreover, the company is targeting a USD 200 million of annualized savings, which would support the margins. 

Q2FY20 Company Presentation

Q3FY20 Financial Highlights:

• UFS announced its quarterly results, wherein the company posted sales of USD 1,124 million, as compared to USD 1,283 million in the previous corresponding period (pcp). The decline was primarily attributable to a significantly lower income from pulp and paper (USD 899 million versus USD 1,079 million in pcp), while an improved performance from personal care partially supported the top line.
• The group reported an operating loss of USD 136 million, as compared to an operating income of USD 29 million in pcp. The loss was attributable to an operating loss from pulp and paper segment amounting USD 140 million, as compared to a profit of USD 31 million in Q3FY19.
• Net loss stood at USD 92 million, as compared to a net profit of USD 20 million in pcp.
• The company reported higher cash and cash equivalent of USD 218 million, as compared to USD 61 million in FY19, while total assets were recorded at USD 4,791 million.                                

Income Statement Highlights (Source: Company Reports)

Risk: further breakout of COVID-19 may affect the demand for the group’s offerings, which would impact the overall performance.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The Company witnessed excellent cost performance within the Personal Care with impressive operational and commercial execution, which is a key positive. Going forward, the company would work on Kingsport conversion to recycled linerboard and is expecting to receive first equipment deliveries with construction set to begin by Q2FY21. The company has signed an agreement with Voith, which would provide equipment & technical services at Kingsport, seems impressive. Going forward, we expect a gradual recovery in demand which would improve the group’s performance.  We have valued the stock using Price to CF-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Resolute Forest Products Inc, International Paper Co etc.  Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 39.03 on December 1, 2020.

UFS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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.