CIBC commentsMAPLE LEAF FOODS INC.
Q3 Preview: Lowering Estimates Due To Ongoing Headwinds
Our Conclusion We have made several changes to our MFI model to reflect ongoing headwinds in the Meat Protein business. Our Q3 EPS estimate falls to $0.03 (from $0.14; consensus $0.12) and our 2023 forecast is now $1.69 (from $1.94; consensus $1.72).
We have also moderated our target EV/EBITDA multiple in Meat Protein to 9.0x (from 9.5x) to reflect the difficult operating environment and lack of visibility on both the timing and trajectory of the EBITDA margin recovery. Based on 2023 estimates, our price target falls to $32 (from $35), and MFI remains Outperformer rated.
Key Points
In Meat Protein, Maple Leaf continued to face a challenging operating environment in Q3 due to: 1) unfavourable hog markets with packer margins well below the five-year average ($2.60 in Q3 vs. the five-year average of $11.50); and, 2) ongoing labour vacancies, which negatively impact manufacturing capacity. Furthermore, MFI will also face a slight currency headwind due to a weaker yen, with Japan accounting for 9% of LTM revenues. That being said, pricing actions taken in late August should be a slight tailwind for one month of the quarter. Putting all the pieces together, we have reduced our Q3 Meat Protein EBITDA estimate to $108MM (from $127MM).
In Plant Protein, we continue to expect a choppy top line but EBITDA losses to narrow modestly on a sequential basis due to steps taken to right-size SG&A spend (i.e., lower advertising and promo spend as well as a reduction in the size of the Greenfield Organization by 25%). We model an EBITDA loss in Plant Protein of ($23MM) vs. ($30MM) in Q2. On the call, we will look for updates on: 1) labour vacancy rates in Meat Protein, both exiting Q3 and QTD; 2) the timing and ramp-up of the London poultry facility; 3) progress on right-sizing the Plant Protein manufacturing footprint; and, 4) capital allocation priorities. As of October 5, MFI has utilized 20% of its NCIB (7.5MM shares authorized).
Investment Thesis
The meat business is delivering on its strategic priorities of sustainable meat and brand renovation. The optimization of its Poultry network over the next 24 months provides an opportunity to streamline operations and Meat EBITDA margins should be well into MFI’s stated goal of 14% to 16% in 2023. Though meat generates ~95% of sales, the challenges in plant weigh heavily on earnings, cash flows and investor sentiment. Management outlined a target of reaching breakeven EBITDA in plant within 18 months, though more details and progress are needed.
Price Target (Base Case): C$32.00 Our base case assumes five-year-average commodity market conditions, with healthy underlying trends in the Meat Protein business, boosted by COVID-19-driven retail demand in the near term. We value meat at 9.0x EBITDA. We value the Plant Protein business at 0.
Upside Scenario: C$41.00 In this scenario we add 10% to our meat earnings forecast, and increase our Meat Protein multiple by 0.5x and Plant Protein multiple by 1.0x.
Downside Scenario: C$14.00 In this scenario, we assume a 30% haircut to meat earnings, and reduce our Meat Protein multiple to 7.5x.