Lassonde Industries Inc.

Lassonde Industries Inc. (TSX: LAS.A) is engaged in the development, manufacturing, and marketing of ready-to-drink fruit and vegetable juices and drinks.  The company also produces store brand shelf-stable fruit juices and drinks within the United States and is a major producer of cranberry sauces.

Investment Rationale:

• The group reported a decent quarterly result with improvement in Sales, Operating profit and Net Profit.
• The industry is witnessing a significant change in the consumption pattern, and the business reported growth across the US and Canada market, which is encouraging. Industry sales volumes have increased significantly over the twelve-week period ended June 27, 2020, in both Canada and the United States. Further, we believe the recent acquisition would likely to enhance the company’s product like and improved its overall prospects.
• The company impresses with its operating cash flow levels. Cash generated from operating activities was significantly higher at CAD 78.06 million, as compared to CAD 11.33 million in pcp, due to a change in non-cash operating working capital. We expect the continuation of the above trend in the coming days.

Q2FY20 Financial highlights:

• Lassonde Industries posted Q2FY20 sales at CAD 498.207 million, reflecting an increase of 18.7% on y-o-y basis, aided by higher sales of private label products, favorable foreign exchange impact, and a favorable change in the sales mix of national brands coupled with improved selling prices on national brand sales. However, the positives were partially offset by a declining volume of national brands and lower slotting fees.
• The company reported a higher cost of sales at CAD 352.707 million against CAD 305.525 million in pcp, primarily attributed to an added cost from the newly acquired Sun-Rype coupled with an additional production cost related to the pandemic. However, a decrease in input costs, especially orange concentrate and the resin used to manufacture plastic bottles supported the profitability.
• Operating profit stood at CAD 42.658 million, as compared to CAD 27.549 million in previous corresponding period (pcp), thanks to higher sales, partially offset by an increase in the cost of sales and selling and administrative expenses.
• Net profit soared to CAD 27.518 million, versus CAD 16.193 million in Q2FY19, aided by lower finance expenses.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks:  The company is exposed to a variety of risks, including the economic, industrial, competitive and regulatory environment, its ability to attract and retain customers, changing consumer preferences, the availability and cost of raw materials and transportation, etc.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation: The stock of corrected ~2% so far this year. The products of the company are directly related to the consumption pattern, and higher consumer spending would lead to higher demand for these products. Barring any significant external shocks, including the impacts of COVID-19’s evolution (and excluding foreign exchange impacts and the impact of the Sun-Rype acquisition to maintain a comparable basis), the Company expects that, for 2020, it will be able to achieve a consolidated annual sales growth rate above that of 2019 without a marked decrease in its current growth rate for the remainder of the fiscal year. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have peers like Calavo Growers Inc, Rogers Sugar Inc etc. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 152.5 on October 21, 2020.

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

Saputo Inc.

Saputo Inc. (TSX: SAP) is engaged in the manufacturing and production of dairy and cheese products. The group operates across Canada, the U.S., Argentina, the United Kingdom, and Australia. The company ranks among the top cheese producers across the U.S. and Canada and derives the majority of the revenue from these Geographies. The group operates through its brands like Saputo, Armstrong, Frigo, and Stella.

Investment Rationale:

• Focusing on margin-improvement: The company is focusing on improving its sales-mix by pushing its value-added products, and also improving its operational efficiencies. These initiatives are likely to result in margin improvement for the group.
• Focusing on growth: Apart from a stable organic growth through strategic capital investments, the company is seeking growth through new product development and would expand its footprints across the export markets. The company is also looking for new business avenues through the acquisition, which would strengthen its existing business.
• Product Diversification: The company’s new plant-based products received a positive response from the consumers, and we believe the segment has enough potential and would contribute to the company’s future growth.
• Focusing on reducing debt: The company has improved its financial flexibility and reported Net debt to adjusted EBITDA at 2.66x during Q2FY20, improved from 2.84x in FY19. A lower multiple is an indicator of higher financial flexibility. Meanwhile, the company targets to lower-down its future net debt to adjusted EBITDA to ~2.25 times, which is impressive.

Q2FY20 Financial Highlights:

• Net revenue declined to CAD 3,390.8 million from CAD 3,668.4 million in the previous corresponding period (pcp). The decline was due to a lower sales volume from foodservice and industrial segments.
• Adjusted EBITDA and net earnings grew to CAD 366.5 million and CAD 141.9 million as compared to CAD 358.0 million and CAD 121.4 million, respectively in pcp.
• During the quarter, the business reported higher volume from the retail market segment, as the Canada segment benefited from higher sales volumes, primarily from the fluid milk category.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Change in consumer preference might lead to a demand destruction scenario for the business. Furthermore, lower acceptability of plant-based products may dampen the company’s performance.

Valuation Methodology (Illustrative): Price to Earnings based

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

Stock Recommendation: The stock of SAP fell 14% so far this year. The group would continue with its disciplined approach and remain focused on synchronizing with the changing demand scenario, understanding the new normal and leveraging its global network. The sales volumes within the retail market segment witnessed a decent growth amidst setback across the foodservice and industrial market segments, which is a key positive. Further, demand improvement across the European market has rendered a room for growth for the business. The Management remains positive on the company’s dairy product segment and intends to diversify its product portfolio by pursuing plant-based opportunities in the coming days. We have valued the stock using P/E based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered industry (Food & Tobacco) mean on NTM basis. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the current closing price of CAD 34.49 on October 21, 2020.

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

Disclaimer

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