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 group's primary markets are Canada, the United States, Mexico, and Japan. 

Key Updates:

• Capacity Addition: Recently, the company reported that it is advancing plans to increase tempeh production capacity through the acquisition coupled with a planned build-out of a food processing plant in Indianapolis, Indiana, which is expected to begin in the first half of FY22. The Management would further evaluate the demand scenario and would enhance its capacity. With the above addition, the company is expected to retain its market leadership within the plant-based protein segment.
• Launch of Field Roast's Plant-Based Pepperoni: The company along with Pizza Nova, announced the launch of Field Roast Plant-Based Pepperoni across all the Pizza Nova locations. Field Roast Plant-Based Pepperoni is the first pepperoni alternative which is being extracted from pea protein and offers the same food-value as traditional pork pepperoni. Apart from the above product, the Field Roast’s portfolio includes more than 25 plant-based meats and cheeses and is expected to deliver improved business prospects for the company.

Q3FY20 Financial Highlights:

• MFI announced its quarterly results, wherein the company posted sales of CAD 1,057.16 million, as compared to CAD 995.78 million in the previous corresponding period (pcp). The increase was driven by improved traction from both Meat and Plant Protein Groups. Meat Protein Group sales growth is attributable primarily to increased demand within the retail channel across North America, coupled with strong sales growth in sustainable meats, higher exports to Asian markets, partially offset by lower volumes in foodservice. Moreover, within the group’s plant protein segment, MFI registered a growth of 9.3% on y-o-y, driven by investments across new products categories.
• Gross profit soared to CAD 228.114 million, as compared to CAD 139.717 million in pcp, supported by improved revenue and a lower cost of goods sold (CAD 829.055 million versus CAD 856.070 million in pcp).
• Earnings before interest and income taxes stood at CAD 97.839 million, increased significantly from CAD 9.945 million in pcp, supported by a higher gross profit, restructuring and other related costs and other expense, partially offset by a higher selling, general and administrative expenses (CAD 127.165 million versus CAD 123.650 million in Q3FY19).
• Net earnings were reported at CAD 65.976 million, higher than CAD 13.409 million in pcp.
• Cash and cash equivalents were reported at CAD 178.190 million, while total assets were recorded at CAD 3,774.210 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The demand for the products depends upon the consumer preference and taste, while a change in the consumer demand may weigh high on the sales volume. Moreover, with the emergence of the new players within the industry would lead to price competition, which may dampen the company’s margins.

Valuation Methodology: Price/Earnings Based (Illustrative)

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

Stock Recommendation:

In the recent past, the company has successfully implemented its growth strategies and maintained prudent capital allocation, which is a key positive, and we believe the trend to continue in the foreseeable future. The company is focusing on improving its EBITDA margin and also investing in poultry facility and other projects to enhance the capacity. We have valued the stock using the P/E based relative valuation approach and arrived at a target price, which suggests a high double-digit upside side potential (in % terms). For the said purpose, we have considered industry (Food & Tobacco) average on NTM basis. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 26.15 on January 18, 2021.

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

Torex Gold Resources Inc

Torex Gold Resources Inc (TSX: TXG) is an intermediate producer of gold and other precious metals, engaged in the exploration, development, and exploration of its wholly-owned Morelos Gold Property, located in the prolific Guerrero Gold Belt in southern Mexico and consists of approximately seven mineral concessions covering a total area of over 29,000 hectares. 

Key highlights

• Record gold sold:In Q3 2020 the Company reported gold production of 131,790 ounces, which is the second-highest quarter of production ever from its El Limón Guajes (ELG) operations. In contrast, the Company sold record 133,030 ounces of gold at an average realized price of USD 1,880 per ounce. We expect the gold prices to remain higher in the near term on account of the sluggish economic outlook, which would help the Company in reporting improved financial performance. 

• FY2021 operational outlook: On the back of continuous pattern of consistent and reliable operational performance, the gold production in 2021 is expected to be between 430,000 - 470,000 ounces, with the mid-point representing an increase over the 430,480 ounces delivered in 2020. The capital expenditures would be in a range of USD70 - USD85 million, of which USD40 million to USD45 million is related to capitalized waste.

Source: Company

• Robust balance sheet: The Company maintains strong liquidity position with a cash balance of USD 204 million, which excludes short-term investments of USD 32.0 million, compared to a cash balance of USD 161.8 million on December 31, 2019. The increase in net cash is mainly due to the rise in the average realized price of gold. Further, debt reduced to USD 155 million from CAD 174.9 million at the end of 2019. 

• Record cash flow from operating activities: In Q3 2020, the company generated record cash flow from the operation of USD 173.3 million, against USD 122.5 million in Q32019. Free cash flows for the quarter totalled USD 124.2 million. 

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the Company posted revenue of USD 256.5 million, increasing by 29.4% compared to USD 198.2 million in the previous corresponding period. The increase in revenue is primarily due to higher average realized prices per ounce, which was USD 1,884 per ounce in Q3 2020 against USD 1,478 per ounce in Q3 2019.

• Cost of sales stood at USD 153.5 million in Q3 2020, compared to USD 130.1 million in the previous corresponding period, primarily due to higher depreciation and amortization.

• In Q3 2020 the Company posted a net income of USD 60.3 million, increased by 120% as against USD 27.4 million in the previous corresponding period, primarily due to higher average realized gold prices, partially offset by higher income tax expense. 

Risk associated with investment

The company’s financial performance is dependent on the price of gold, which directly affects its profitability and cash flow. The price of gold is subject to volatile price movements. It is affected by numerous factors, such as the strength of the US dollar, supply and demand, interest rates, and inflation rates, all of which are beyond the Company’s control.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock recommendation

We believe that gold as an asset class would continue to remain in the limelight as uncertainty over global economic growth is still prevailing. The average realized gold prices per ounce would continue to expand, which would lead to margin expansions. The gold production in 2021 is expected to be in the range of 430,000 - 470,000 ounces on the back of continuous consistent and reliable operational performance. Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 17.51 on January 18, 2021. We have considered Teranga Gold Corp, New Gold Inc, Centerra Gold Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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