Desjardins on plant tour "
We attended a presentation and site visit hosted by RSI management at the company’s sugar refinery in Montral, Qubec. Overall, we came away with steady conviction about the positive Canadian sugar market outlook, RSI’s sugar capacity expansion project and ongoing recovery in Maple (as highlighted in our recent upgrade). With valuation and the dividend yield (6.2%) also looking sweet, we are reiterating our Buy recommendation.
Highlights
Eastern Canada is a sought-after region for food manufacturers that sell into the US, which stimulates demand for bulk sugar. North American sugar consumption remains on an upward trend, fuelled by population and GDP growth. Considering that the US relies heavily on imports and that sugar production from Mexico is at a 27- year low, Canada is attractive thanks to its reliable supply of refined sugar, the price differential between #16 and #11 raw sugar futures, and the C$/US$ exchange rate. This is pushing manufacturers of sugar-containing products (eg chocolate) to build or expand production facilities in Canada. As a leading supplier of bulk sugar to the food manufacturing sector, RSI looks well-positioned to support its customers’ growth north of the border.
Positive update on capacity expansion.
During the visit, we saw current operations (eg raw sugar arriving at the port and RSI’s refining operations) as well as initial construction work related to the ~20% (~100,000MT) capacity expansion project scheduled to be commissioned in 1H FY26. While this type of project naturally carries some execution risk, management highlighted some mitigating factors, including: (1) equipment purchase and installation from a best-in-class European manufacturer; (2) learnings from a past expansion in Montral; and (3) limited disruption to current operations as the new capacity will be installed in a vacant space and run as a parallel production process.
Forecasts.
We made minor tweaks to our FY24 estimates and kept our FY25 forecasts unchanged. Following strong 2Q FY24 results, management is confident that the Sugar segment can continue generating attractive margins.
Valuation
Our C$7.50 target is based on 9x EV/EBITDA on our FY25 estimates, in line with RSI’s five-year average multiple.
Recommendation
We maintain our Buy recommendation."