BMO report on RSI Plant Tour - a lot to likePublished by BMo on May 22nd post plant tour:
"Bottom Line:
Rogers Sugar's CEO Mike Walton, CFO J.S. Couillard, and members of the Senior
Operations team hosted a presentation and tour of the Montreal sugar refinery. We
came away with an improved appreciation for the rationale behind the company's
100k MT capacity expansion (supported by robust bulk sugar demand from SCP
manufacturers that sell into the U.S.) as well as its ability to maintain Sugar margins at
or near historically high levels. We see balanced risk-reward given recent strength but
view the stock as attractive for income-oriented investors (~6.1% dividend yield).
Key Points
Demand for Canadian sugar expected to remain robust, supported by a structural
supply deficit in the U.S. market. Sugar consumption in the U.S. has increased by
~1.8mm MT over the past 12 years without material refining capacity increases; as a
result, the U.S. imports ~4mm MT of sugar annually (~1/3 of U.S. consumption).
Multinational companies that manufacture sugar containing products (SCP)
are investing in Canada. At current levels, sugar prices in Canada (#11 sugar price)
are roughly half of U.S. benchmark prices (#16 sugar price). This pricing differential,
favourable F/X, and a reliable supply of low-cost Canadian refined sugar have attracted
global SCP manufacturers that export to the U.S. market.
Recent gross margin strength in the Sugar segment expected to continue. As
outlined in our recent Farm to Market takeaways flash, strong demand for Canadian
sugar supports adj. GM per MT in the ~$180-200 range, up from ~$171 in 2023A and ~
$138 average over last five years.
The $200mm 100k MT Montreal capacity & distribution infrastructure expansion
(LEAP Project) is on schedule for startup in 2026E. Due diligence prior to construction
has been extensive and management is confident in delivering the project on time and
on budget. Reflecting strong demand, nearly all incremental sugar capacity coming
online has been allocated to new and existing bulk sugar customers.
Maple segment recovery expected to continue. Recent market-based price increases
and optimization initiatives have led to improved margins (adj. EBITDA margin +410 bps
y/y to 8.4% in Q2/24). Guidance for 2024E revenue and adj. EBITDA to be higher y/y.
Management expressed confidence in achieving 2024E guidance for y/y revenue
and EBITDA growth. Strengthening results over the past two years reflect Rogers
Sugar's strategic shift towards consistent, profitable, and sustainable growth to take
advantage of favourable Canadian Sugar trends and drive improved Maple margins."