Lassonde Industries Inc

Lassonde Industries Inc (TSX: LAS.A) operates as a developer, manufacturer, and distributor of ready-to-drink fruit and vegetable juices and drinks. Apart from these, the corporation is also a producer of store brand shelf-stable fruit juices and drinks in the United States along with a principal producer of cranberry sauces. 

Key Highlights:

• Improved Financials: The company posted decent revenue growth over the years. Revenue grew from CAD 1,449.287 million in FY15 to CAD 1,678.301 million in FY19, which reflects higher acceptability of its products. Net profit and cash flow from operating activities, during FY19, stood at CAD 71.977 million, and CAD 140.731 million, respectively, from CAD 56.979 million and CAD 116.834 million in FY15.

Financial Parameters (FY15-FY19)

• Positive Demand Outlook: Despite a slide in the overall consumption pattern, the U.S. and Canadian fruit juice and drinks market stood resilient in the recent past, and the company registered a growth of 5.3% on y-o-y basis primarily attributable to the change in the consumption pattern. We expect, the above trend to continue in the upcoming days, and the corporation is likely to deliver an improved top-line for FY20, which is a key positive and is likely to support the profitability and cash flows as well.
• Consistent dividend payment: Despite challenging operating environment, the group continue to distribute dividend, which shows the financial flexibility of the group. On November 06, 2020, the company declared a quarterly dividend of CAD 0.65 per share, payable on December 15, 2020.

Q3FY20 Financial Highlights:

• The group announced its third-quarter results, wherein the company posted CAD 495.207 million, higher than CAD 422.882 million in the previous corresponding period (pcp). The increase was driven by a higher in sales of private label products and a favourable change in the sales mix of national brands.
• Operating profit stood at CAD 40.018 million, as compared to CAD 24.952 million in Q3FY19. This increase was explained by higher gross margins from the Company's U.S. and Canadian operations, mainly due to an increase in sales volume, to a decrease in the cost of certain raw materials, and to an improvement in the production rate at one of the Company's plants.
• The company posted a net profit of CAD 26.370 million, higher than CAD 15.618 million a year ago.                  

Q3FY20 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 Company noted a marked increase in industry sales volumes in the U.S. and Canadian fruit juice and drinks markets. Excluding Sun-Rype's sales and foreign exchange impacts, the Company's sales were up 5.3% in the third quarter of 2020 compared to the same quarter in 2019. Barring any significant external shocks, including the impacts of COVID-19's evolution, the Company expects that, for 2020, it will be able to achieve a consolidated annual sales growth rate above that of 2019. 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 considered peers like Rogers Sugar Inc, Simply Good Foods Co and B&G Foods Inc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 158.26 on November 9, 2020.

LAS.A 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 and 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.

Key Highlights

Improved Financials: The company posted an improved top-line with growth in the Adjusted EBITDA during FY18 to FY20, driven by higher traction for the dairy and cheese products across the US, Argentina and Canada. The company has made prudent investments during the recent past, which has resulted in organic growth during the period.         

FY18-FY20 Financial Snapshot (Source: Company Reports)

Product Innovation and higher product-demand: The group’s new offering i.e. plant-based products received positive responses from the consumers in the recent past, which is a key positive. We believe, as the products are relatively new to the consumers, the company would have the upper hand in case of a growing consumer demand followed by an increase in the industry size.

Q2FY21 Financial Highlights:

• In the second quarter of FY21, the company posted revenue of CAD 3,702.2 million, as compared to CAD 3,665.6 million in the previous corresponding period (pcp). Canada segmented benefited from increased sales volumes in the retail market segment, which more than offset decreased sales volumes in the foodservice market segment. 
• Adjusted EBITDA lowered to CAD 370.5 million, as compared to CAD 394.4 million, due to lower sales volumes on account of shift in consumption pattern combined with lower efficiencies and absorption of fixed costs, particularly within the USA. 
• A decrease in international cheese and dairy ingredient market prices negatively affected adjusted EBITDA, despite higher export sales volumes.
• Net earnings declined marginally to CAD 170.8 million, from CAD 174.9 million in Q2FY20.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: Sales volumes within the foodservice market segment remained under pressure during the quarter and remained below historical levels. Continuation of the same trend would weigh on the margins.

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 has corrected ~16% so far this year. The company is focusing on growth potential across several existing distribution channels. The company is working closely with customers in order to develop its innovative product offerings as per the new consumer trends, such as take-out for in-home dining, which is expected to benefit the company. We expect a gradual recovery in demand from the foodservice segment as the government allowing the segment to resume operations. 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 closing price of CAD 33.87 on November 09, 2020.

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

Disclaimer

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