Saputo Inc.

Saputo Inc. (TSX: SAP) is a dairy processor and cheese producing company which operates in Canada, the U.S., Argentina, the United Kingdom, and Australia and sells products in more than 50 countries. The company's brands include Saputo, Armstrong, Frigo, and Stella. The group operates through three segments, namely retail, foodservice and industrial.

Key Updates:

• Sequential Improvement: With the gradual revival of the economy, the foodservice industry is showing sign of improvement, which is visible from the improved performance on a sequential basis. The group reported revenue, adjusted EBITDA and net earnings of CAD 3,762.9 million, CAD 1 million and CAD 209.8 million, respectively, as compared to CAD 3,702.2 million, CAD 370.5 million, and CAD 170.8 million, respectively in Q2FY21.

Source: Company Reports

• Recovery in Demand and outlook: In Q3FY21, overall sales volumes stood at par with the last fiscal year, which is encouraging and suggests a demand revival. Meanwhile, the company has benefited from increased sales volumes within the retail and industrial market segments, which is a key positive too. The group expects the volatility the dairy commodities market to moderate in the coming quarters, while the group is focusing on innovative offerings, based on the current consumer trends, such as take-out for in-home dining, which are expected to outlast the pandemic.

Q3FY21 Financial Highlights:

• SAP announced its quarterly results, wherein the group posted revenue of CAD 3,762.9 million, as compared to CAD 3,890.8 million in the previous corresponding period (pcp). The decline was majorly attributable to lower income from USA segment (CAD 1,656.8 million versus CAD 1,848.7 million in pcp), partially offset by improved income from the rest of the segments.

• The group reported higher traction from retail and industrial segments, while the foodservice segment posted a slide in income on y-o-y basis.

Q3FY21 Segment Snapshot (Source: Company Reports)

• Adjusted EBITDA stood at CAD 431.1 million, higher than CAD 417.0 million in Q3FY20. The quarter was marked by lower operating costs, which stood at CAD 3,331.8 million versus CAD 3,473.8 million in pcp.
• The group reported net earnings of CAD 209.8 million, higher than CAD 197.8 million in the previous corresponding period.
• The group reported cash and cash equivalent of CAD 505.7 million, while total assets were recorded at CAD 13,370.4 million at the end of Q3FY21.

Q3FY21 Income Statement Snapshot (Source: Company Reports)

Risks: The performance of the company’s business is prone to several risks which could affect its financial performance. Risks related to resource supply, food processing, suppliers, customers, competition, inflation, and foreign exchange exposure, etc. are beyond the management control.

Valuation Methodology (Illustrative): EV to Sales based

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

Stock Recommendation:

SAP is working to develop an accelerated global strategic plan laying out the Company’s strategy to drive accelerated organic growth across all its platforms over the coming years. Despite the ongoing slowdown, the group managed to report higher cash from operations of CAD 927.8 million for 9MFY20, as compared to CAD 741.7 million, a year ago. The stock of SAP closed above the long-term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish price trend. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers Metro Inc, Loblaw Companies Ltd etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 36.9 on February 5, 2021.

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

Atco Ltd

Atco Ltd (TSX: ACO.X) is a Canada-based holding company offering infrastructure solutions to customers worldwide. The Company is engaged in the business activities: Structures & Logistics, Canadian Utilities and Neltume Ports.

Key highlights

• An Income play:When most businesses are suspending or curtailing the dividends, the group is increasing the dividend distribution, which is encouraging from an income investor’s standpoint. Recently, the company declared a first-quarter dividend of CAD 0.4483 per share, a 3% increase over CAD 0.4352 paid in each of the four previous quarters. The group has a healthy dividend pay-out practice; this translates in an essential factor for regular income-seeking investors with a long-term horizon. Moreover, at the last closing price, the stock is offering a dividend yield of 4.796%.

Source: Company

• Focusing on renewable electricity generation portfolio:The company is focused on expanding its renewable electricity generation capabilities. Canadian Utilities sold the entire Canadian fossil fuel-based electricity generation business for aggregate proceeds of CAD 821 million, consisting of 12 coal-fired and natural gas-fired electricity generation assets generating approximately 2,300 MW.

• Industry Beating Margins: The Company's resilient business helped them leaping the industry median margins on many fronts. The matrix below gives a glimpse of this. To come out with more conclusive numbers, we took the company's average margins of the past ten quarters.

Source: Refinitiv (Thomson Reuters)

• Robust liquidity: The on-going steady performance of the company’s operations and constant upgrading in the strength of their balance sheet resulted, with total available liquidity of CAD 3.84 billion.

Source: Company 

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the Company posted revenues of CAD 897 million, CAD 200 million lower against Q3 2019. This decline in revenue was primarily due to sale of the Canadian fossil fuel-based electricity generation business in the third quarter of 2019 and subsequent sale of Alberta PowerLine (APL) in the fourth quarter of 2019.
• On the back of lower revenues and higher depreciation in Q3 2020, the company posted its operating profit of CAD 240 million, compared to 494 million in the previous corresponding period.
• Net earnings stood at CAD 108 million in Q3 2020, against 305 million in Q3 2019, due to above stated reasons. 

Risks associated with investment

An outbreak of infectious disease, such as the COVID-19 pandemic could adversely impact the Company by causing its operations, supply chain and project development delays and disruptions, labour shortages and shutdowns because of government regulation and prevention measures, could harm the Company’s operations and its ability to earn profits. 

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

The utility segment is likely to remain stable in the coming quarters, as the sector is categorized under "essentials" and the business expects to benefit from the improved realization prices. The company has a concrete financial strength, with a cash position of approximately CAD 1.29 billion as on 30th September 2020 and unused credit facility of CAD 2.54 billion. Furthermore, the industry-beating margins of the company reflect the resilience of the business. Also, a consistent dividend-paying company, with a dividend yield of ~4.8% is like a big yes to the investors seeking quality for the long-term horizon. Therefore, based on the above rationale and valuation, we have given a "Buy" rating at the closing price of CAD 37.39 on February 5, 2021. We have considered Canadian Utilities Ltd, Emera Inc, TC Energy Corp, etc. as a peer group for the comparison.

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.