Saputo Inc.

Saputo Inc. (TSX: SAP) produces, markets and distributes dairy products, including cheese, fluid milk, extended shelf-life milk and cream products, cultured products and dairy ingredients. The Company has a presence around the world through its Canada Sector, USA Sector, International Sector and Europe Sector, with products sold in over 50 countries. 

Key highlights 

• Streamlining the business: By merging two USA divisions, now known as the Dairy Division (USA), the group has built a more agile USA platform, aligned under a common strategy. Therefore, the company is in a more comfortable position to serve its customers more efficiently and meet their rapidly evolving needs and expectations. Over time, this merger is expected to deliver synergies from all facets of the business. 

• Well positioned for organic growth: The company is well-positioned to grow organically through strategic capital investments in designated manufacturing facilities, as well as through new product development along with expansion in the export market. We believe that with the upcoming products, the company would expand its customer base, resulting in better revenues.

• Diversifying its product portfolio:The group is looking for diversifying its product portfolio by pursuing alternative dairy opportunities and remains very bullish about dairy products. The company believes that there are multiple sustainable growth opportunities in the dairy space. 

Financial overview of Q2 2021 (in millions of CAD dollars)

Source: Company 

• In Q2 2021, the company posted revenue of CAD 3.7 billion, an increase of CAD 36.6 million or 1.0%, as compared to CAD 3.6 billion in the previous corresponding period. Higher domestic selling prices positively impacted the revenue in the Canada Sector, which increased due to the higher cost of milk as raw material.

• The company posted EBITDA of CAD 370.5 million, decreased by CAD 23.9 million or 6.1% in Q2 2021, as compared to CAD 394.4 million in Q2 2020, due to lower sales volumes, as a result of the shift in consumer demand, negatively impacted efficiencies and the absorption of fixed costs, particularly in the USA Sector.

• Net earnings for Q2 2021, stood at CAD 170.8 million, decreased by CAD 4.1 million or 2.3%, as compared to CAD 174.9 million in the previous corresponding period. 

Risks associated with investment

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 EBITDA 

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

Stock recommendation

The Company expects the volatility in dairy commodities to be more moderate during the second half of fiscal 2021 and into the start of fiscal 2022. However, the group has well-established brands and has a significant presence across the North American market, along with a strong client base, which ensures stable business performance. Compared to pre-pandemic levels, consumer demand in the retail market segment has generally been higher. Through its strong portfolio of retail brands, the Company has captured opportunities arising from this increase and has an innovative pipeline to drive further progress. Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 35.22 on December 21, 2020. We have considered Metro Inc, Dollarama Inc, Jamieson Wellness Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Alamos Gold Inc

Alamos Gold Inc (TSX: AGI) is engaged in the exploration, and production of gold and other precious metals, and operates across two principal geographic areas, namely Canada and Mexico. The company has three operating mines in North America, and two mines in Mexico.

Key Highlights:

• Impressive Guidance: The company expects an improved operating performance for FY21, wherein the AGI indicates a higher gold production along with lower total cash costs and a decline in cost of sales from FY20. All of this augurs well for improved margins and profitability.

Source: Company Presentations 

• Acquisition of Trillium Mining Corp.: On December 17, 2020, the company announced the acquisition of Trillium Mining Corp. for a cash consideration of CAD 25 million. Trillium holds a large land package, which includes 5,418 hectares directly adjacent to the Island Gold Deposit within the Michipicoten Greenstone Belt. The above acquisition is expected to report high-grade gold mineralization in the coming periods. 

• Solid Operational metrics: Over the years, the company reported a solid operational performance, driven by improved gold production, growth in mineral reserves and sustainable growth in the cash flows. Gold production and Mineral reserves increased simultaneously by ~254% and ~460%, respectively from 2014 to 2019, while the company’s cash provided by operations grew ~482% at the same time.

Source: Company Presentations 

Q3FY20 Financial Highlights:

• AGI announces its quarterly results, wherein the company posted operating revenue of USD 218.4 million, as compared to USD 172.9 million in the previous corresponding period (pcp). The increase was driven by higher average realized prices (USD 1,882/oz versus USD 1,448/oz, a year ago), partially offset by lower sales volume (116,035 ounces versus 119,392 ounces in Q3FY19).

Source: Company Reports 

• Cost of sales stood lower at USD 122.6 million, as compared to USD 127.3 million in Q3FY19.
• Earnings from operations stood at USD 88 million, stood higher from USD 37.5 million, a year ago.
• Net earnings stood at USD 67.9 million, increased significantly from USD 17.7 million in the previous corresponding period (pcp).
• Cash and cash equivalent were reported at USD 274.1 million, while the company reported its total assets at USD 3,616.7 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company’s income is directly correlated with the international gold prices, and any price volatility would lead to a lower realization price and might dampen the income of the company.

Valuation Methodology (Illustrative): P/CF multiple based

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

Stock Recommendation:

We expect the price of gold to remain elevated in the foreseeable future, supported by lack of investment options and falling interest rates scenarios, which augurs well for improved price realizations. The company reported an impressive cash flow from operations for in 9MFY20 at USD 237 million, higher than USD 182.6 million in pcp, which is a key positive. Furthermore, a decline in the mining and processing costs augurs well for lower costs of sales, which would support the company’s margins. We have valued the stock using Price to CF based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have peers like Eldorado Gold Corp., Kirkland Lake Gold Ltd etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 11.82 on December 21, 2020.

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

Disclaimer

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