Maple Leaf Foods Inc.
Lean protein: Outlook constructive notwithstanding transient headwinds in Q1
Our view: While Q1 results were lower than expected, transient weakness had been well telegraphed and modest positive share price reaction could be an indication that share price is forming a bottom. With incremental guideposts around the path forward in Plant Protein, fully implemented price initiatives as of Q2, and an improving labour backdrop with COVID- related absenteeism now essentially resolved, management constructive on ability to achieve the low end of 14-16% EBITDA margin in Meat by the end of 2022. Caveat remains evolution of Ukraine situation and impact on grain complex/cost inflation.
Key points:
Plant Protein goalposts coming into focus. Management clarified EBITDA breakeven or better by H2/23, with gross margin run rate 30% and SG&A <US$50 MM. To get to the 30% gross margin in 2023 (Q1/22 GM: -14% of which start- up costs ~500 bps) and EBITDA breakeven, MFI will need to repurpose excess plant production capacity into the meat business first and foremost, in addition to right-sizing the legacy plant protein facilities, and ramping the volume in the new Tempeh facility. Repurposing excess plant protein capacity involves equipment alterations and the development of alternative products, which requires lead time particularly if the offering is geared toward size volume for the QSR channel.
Moderating 2022E to reflect Q1 results and more gradual progression toward EBITDA breakeven in Plant Protein, 2023E largely unchanged.Incorporating Q1 results into our model, tweaking Meat Protein to reflect pricing and improving plant level labour conditions, and adjusting the lead time to repurposing excess capacity in Plant Protein, trims 12% from our F22E EPS. Our EPS forecasts exclude estimated start-up costs previously noted to be ~$0.90/share in F22E and ~$0.35/share in F23E.
Compelling opportunity for patient investors. Our $42 price target is predicated on 9x LTM Q3/23E EBITDA on Meat Protein and nominal value for Plant Protein. MFI currently trades at 10.2x consolidated our C22E EBITDA, 8.3x excluding plant-based (7.5x consensus), below the ten-year average and food processing peers (exhibits 1 & 2). Notwithstanding transient headwinds related to pandemic and commodity markets volatility, key elements of the strategy to boost profitability are coming together, with several operating catalysts over the next 18-24 months, augmented by FCF inflection that should improve investor sentiment.
Back to tepid Q1 results. EBITDA excluding start-up costs in Meat essentially in line with expectations, reflecting COVID-related absenteeism, supply chain disruptions, and higher costs. Outlook better as of Q2 as pricing initiatives take hold, notably no negative impact on volumes in reaction to price increases. Plant Protein revenue consistent with forecast, EBITDA lower reflecting more gradual path to breakeven (Exhibit 5).