Maple Leaf Foods Inc.

Maple Leaf Foods Inc (TSX: MFI) is a consumer -packaged meats company, originally from Canada. The company produces prepared meats and meals, fresh pork, and poultry and turkey products. The firm also has agribusiness operations. These operations supply livestock to the meat products business operations. The Company's primary markets are Canada, the United States, Mexico, and Japan. 

Key Highlights:

• Recently, the Group announced Nadia Theodore as Senior Vice President of Global Industry and Government Relations with effect from October 13. 
• The Company has completed the previously announced sale of its poultry plant in Drummondville, Quebec, including the associated supply, to Giannone Poultry of St. Cuthbert, Quebec.

Q2FY20 Financial Highlights: MFI came up with its quarterly results, wherein the Company reported sales of CAD 1,094.574 million as compared to CAD 1,022.699 million in the previous corresponding period (pcp). The increase was driven by expanded distribution of new products, and persistent volume increases in its existing portfolio. The quarter was marked by improved demand from hogs processed segments, coupled with a favorable mix-shift towards sustainable meats and branded products, expansion across Asian markets, and a positive impact of foreign currency translation. Gross profit soared to CAD 167.314 million from CAD 110.976 million in pcp, thanks to the higher revenue. Earnings before interest and income taxes stood significantly higher at CAD 45.255 million as compared to CAD 1.703 million in Q2FY10, thanks to higher earnings and a slide in the other expense. Interest expense and other financing costs stood comparatively lower at CAD 8.068 million as compared to CAD 9.078 million in the previous corresponding quarter. The Group reported net earnings of CAD 25.659 million as compared to a net loss of CAD 6.342 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: For the upcoming quarters, the Company might witness price volatility in the pork and poultry segment and a fluctuation across the foreign exchange markets. Furthermore, potential future production could be impacted due to disruptions or shutdowns.

Valuation Methodology: Price/CF Based (Illustrative)

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

Stock Recommendation: The stock of MFI stood resilient in the recent past and gained ~13% and ~26% in the last six months and nine months, respectively. The group’s business is categorized under the ‘essentials’ and is immune to the economic cycle. The company has expanded its footprints across Asia, which is key positives. The company expects the momentum to continue within the coming quarters and expects Meat Protein Group income to grow at mid-to-high single digit, which is encouraging. The company expect the margin expansion to continue in the coming quarters, aided by favorable product mix. The company is focusing on increase its advertisement and promotion activities in order to cater to a larger audience, which augers well for the top-line growth. Further, the company expects plant protein group revenue to record an annual growth of ~30% in 2020 and expect gross margin to remain consistent at FY19 level. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a high single-digit upside side potential (in % terms). For the said purpose, we have considered Alimentation Couche-Tard Inc, Dollarama Inc, and Metro Inc as a peer group for comparison purpose. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 29.46 on July 31, 2020.

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

George Weston Limited

George Weston Limited (TSX: WN) is a Canada based company that operates through three subsidiaries involving in the segments like retail, real estate, and consumer goods. The company caters to the retail segment through one of the subsidiaries named Loblaw, one of the largest grocers in Canada while the company operates through open-ended real estate investment trust through Choice Properties. The third subsidiary of the Company is Weston Foods, which operates in the bakery across North America.

Q2FY20 Financial Highlights: WN declared its quarterly results, wherein the company reported a 6.5% y-o-y growth in the top-line at CAD 12,357 million. The growth was driven by improved performance from each reporting segments. The quarter witnessed strong momentum from the retail segment, which was partially offset by a decrease in financial services revenue. Operating Income stood lower at CAD 401 million as compared to CAD 770 million primarily attributable to higher cost of inventories sold combined with an increase in the selling, general and administrative expenses. Loss Before Income Taxes stood at CAD 120 million as compared to an income of CAD 462 million in the previous corresponding period (pcp). Net Loss stood at CAD 172 million as compared to a net income of CAD 353 million in pcp. The Company’s Adjusted EBITDA stood comparatively lower at CAD 1,087 million as compared to CAD 1,313 million in pcp, primarily driven by the decline in Loblaw retail and financial services coupled with higher selling, general and administrative expenses within the retail segment. Adjusted EBITDA margin stood at 8.8% as compared to 11.3% in pcp. Furthermore, a decline in sales from Weston Foods coupled with an increase in COVID-19 related expenses and higher input costs weigh high on the profitability and margin.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The real-estate business is likely to impact due to the closures of facilities, lower rent payment ability of the tenants, lower consumer demand for tenants’ product or services, temporary or long-term stoppage of development projects etc. The company is likely to face headwinds from higher operating cost due to more in-store cleaning, increased hygiene and sanity spending and in-store security, etc., on account of COVID-19 pandemic.

Valuation Methodology: Price/Earnings Based (Illustrative)

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

Stock Recommendation: The stock of WN corrected slightly amidst a drastic correction in the global equity market. WN stock corrected ~2% so far this year. In the retail segment, the company took prudent steps and enhanced customer convenience by expanding online capabilities. As a result, Everyday Digital sales rose by 280%, which is encouraging. However, the accelerated growth rate has resulted in increased costs and investments in the quarter. The company expects continued growth in its e-commerce business and is likely to invest investing in expanding capacity and enhancing its same-day service offering while also improving the cost structure of the business over time. During the three-month period ended June 30, 2020, Choice Properties collected 89% of the contractual rents which is at the higher end of collections within the industry and is primarily due to the stability of its necessity-based portfolio. We believe, as the economy gradually opens up, the business would witness better rent collection, which would improve the cash flows. The stock closed above the 50-days and 100-days simple moving average of CAD 99.84 and CAD 99.62, respectively, indicating a bullish trend. We have valued the stock using the P/E based relative valuation approach and arrived at a target price, which suggests a lower digit upside potential (in % terms). For the said purpose, we have considered Empire Company Ltd, Metro Inc and Alimentation Couche-Tard Inc etc. as a peer group. Hence, considering the aforesaid facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 101.17 on July 31, 2020.

WN 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.