Author Topic: SAP.TO - Saputo  (Read 3443 times)

bizaro86

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Re: SAP.TO - Saputo
« Reply #10 on: November 08, 2020, 10:24:19 AM »
Canada as a whole would almost certainly be internationally competitive in the international dairy market. But small scale QC producers wouldn't be, and they are politically powerful. AB/BC industry and consumers nationwide are both significantly harmed by the current policy. If I was Prime Minister for a day with power to make one permanent change removing supply management would be it.

I was tangentially involved with a political group trying to promote this change once, and we couldn't even get (even with high level access) the Tories to take it up. They concluded that the change would put rural QC/ON seats out of reach, and that they needed those seats for a potential majority (this was during a Harper minority). And the Tories are the party who is ideologically on board with the idea.

I think it would be very good for the country to have supply management end. I think the country would end up with a new large export industry. We might also be able to trade it for big concessions on other trade matters. I was hoping the new NAFTA would get it ended.


Viking

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Re: SAP.TO - Saputo
« Reply #11 on: November 08, 2020, 10:42:04 AM »
Canada as a whole would almost certainly be internationally competitive in the international dairy market. But small scale QC producers wouldn't be, and they are politically powerful. AB/BC industry and consumers nationwide are both significantly harmed by the current policy. If I was Prime Minister for a day with power to make one permanent change removing supply management would be it.

I was tangentially involved with a political group trying to promote this change once, and we couldn't even get (even with high level access) the Tories to take it up. They concluded that the change would put rural QC/ON seats out of reach, and that they needed those seats for a potential majority (this was during a Harper minority). And the Tories are the party who is ideologically on board with the idea.

I think it would be very good for the country to have supply management end. I think the country would end up with a new large export industry. We might also be able to trade it for big concessions on other trade matters. I was hoping the new NAFTA would get it ended.

Thank you for succinctly explaining the political reality. It sounds as i suspected. So i think we can safely assume supply management is here to stay at least in the short term.

A couple of questions.
1.) how do people see the competitive landscape in Canada from a processor perspective? My read is we have  an oligopoly where they, despite the odd dustup, do not engage in destructive competition. This allows the players to earn healthy profits. Both Saputo and Agropur are using those profits to fund expansion of their business into the US and Saputo more globally.
2.) does anyone have any insight into Saputo’s business in the US? I see that as the key market in the near term (from an investment perspective). How are they able to mitigate their reliance on foodservice (which is likely to suffer as long as covid is with us)? How will the US integration play out?
3.) can anyone comment on the competitive set in Australia? Domestic market and export.
« Last Edit: November 08, 2020, 10:43:44 AM by Viking »

Spekulatius

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Re: SAP.TO - Saputo
« Reply #12 on: November 08, 2020, 12:57:14 PM »
Us farmers are heavily subsidized too, but I am surprised to so how heavy:
https://www.nupoliticalreview.com/2020/05/16/my-beef-with-dairy-how-the-us-government-is-bailing-out-a-dying-industry/

If this source is correct, 42% of the revenue from US dairy farmers are government subsidies.

Other sources seem to indicate lower subsidies, but still pretty high:
https://markets.businessinsider.com/news/stocks/american-dairy-farmers-depend-on-government-subsidies-1015126442
« Last Edit: November 08, 2020, 01:04:01 PM by Spekulatius »
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Cigarbutt

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Re: SAP.TO - Saputo
« Reply #13 on: November 08, 2020, 04:21:52 PM »
^Dairy farms in the US are clearly more productive but a part of that is related to employing undocumented immigrants and to the use of growth hormone, which is controversial. US dairy farms, absent of subsidies, have been essentially unprofitable for at least twenty years.
In theory, this is potentially good for processors (lower input price). As discussed on the Dean Foods thread (went bankrupt), over time, processors consolidated and took advantage of scale and squeezed margins for producers. However, industry dynamics remained in severe excess capacity and fluid milk being essentially a commodity, over time, retailers built negotiating leverage vs producers and, because of excess capacity, started to bypass milk processors in the supply chain and producers have come to rely on subsidies. With the bankruptcy which is ongoing, a group of producers have bought manufacturing assets from Dean Foods (Saputo does not appear interested in the main assets or even some regional units) and the excess capacity will likely only be partially corrected meaning that the fluid milk processing market remains, for now, essentially uninvestable, if the goal is to obtain a reasonable return.

Cigarbutt

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Re: SAP.TO - Saputo
« Reply #14 on: November 15, 2020, 05:14:22 PM »
Just finished updating a long term file.

The positives:
-long and consistent operating history
-long term capital allocation strategy
-the present CEO continues the long term and consistent part
-mature industry but consolidating with residual potential benefits from global scale

The negatives
-significant changes at top management levels in the last 2 years
-diminishing discipline for price paid for acquisitions and for leverage
-Australia exports about 50% of its dairy products and one's level of confidence there is related to the outlook in Japan and China and South East Asia in general

The Covid episode is temporary and could be an opportunity to make acquisitions and to gain market share. SAP has shown significant resilience with the changing balance between foodservice/industrial and retail.

The Canadian market continues to be favorable. The threat related to the reliable and cheap supply of ingredients (fresh milk) and the international entrants vs disruption to supply management remains a potential long term issue. i guess they could manage or adapt.

The US market looks more competitive and paying higher purchase prices for additional processing capacity likely had an impact on EBITDA vs sales trends even before Covid. i thought the Morningstar was a strong acquisition (price paid vs expected and enduring returns).

The Australian market is geared to regional international markets.

From in-house and simplified calculations:
EV/EBITDA     2016:13.8   2017:13.7   2018:14.4   2019:15.8   2020:14.1
Early in the 2020 year (April 2019), they made the large UK acquisition paying what i estimate to be a 14 multiple. The UK acquisition came with scale (learned from previous European market entry attempts before) but they paid a high multiple and the EBITDA appeared to be unusually high when Dairy Crest was acquired so the potential for above average returns is less. The acquisition also came with a pension component which appears to be reported conservatively but underlying numbers are large.

All in all, there is a possibility that SAP returns to a similar profitability profile within the next few months and may re-rate to previous levels which makes this an interesting target especially with a trading mentality component. However, overall, i think SAP has entered a lower profitability profile with expected lower returns on equity. Earnings are likely to grow over the next five years but a lower multiple may be applied on earnings. It's a pass for now and will keep following.

Vanshon

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Re: SAP.TO - Saputo
« Reply #15 on: November 20, 2020, 09:40:24 AM »
FWIW The CEO bought 60,000 shares on November 11 at $34.22 according to insider reporting.