SunOpta, Inc.: Turning Green Power into Gold

| About: SunOpta, Inc. (STKL)

Few would deny that the pro-green, anti-global warming movement has staying power. Unlike previous upsurges in be-kind-to-the-planet pushes, this time around, it does look as if things are different.

What hasn’t changed for investors, however, is that it’s still tough to make black-and-white decisions about which companies will be able to turn the green movement into gold. Particularly in the smaller-cap space, risks often remain high. Some companies have interesting but unproven technology, while others make great products that lack the necessary sales to reduce costs. And those in the green power space often face years of navigation through – and negotiating with – concerned regulators and slow-moving utilities.

This all goes a long way to explaining why analysts have taken a shine to SunOpta, Inc. (Nasdaq: STKL), recently trading at $11.91. Not only does SunOpta have proven revenues for its products, it operates in two distinct “green” sectors. Add in its share of a third business in an entirely unrelated industry, and you have a company that offers reduced risk thanks to its diversification and proven demand, yet retains some of the potential upside that comes with piggy-backing on not one but two emerging long-term trends.

Here’s a look at SunOpta’s three areas of operations, and why each individually is getting good reviews…

Healthier Eating

Some 90% of SunOpta's revenues currently come from its natural and organic food business. The company supplies natural and organic food products (oat and soy fiber, soy- and corn-based ingredients, and fruit-based ingredients) to restaurants and branded food makers. It also produces private label natural and organic food products for retailers and U.S. public schools. Its products include grain-based snacks, soy and rice beverages, tea, and fruit bars.

The operations noted above are largely in the United States. In Canada, SunOpta runs the country’s largest wholesale distribution business of natural, organic, and kosher products (the U.S. comparison would be United Natural Foods (Nasdaq: UNFI).

Looking ahead, growth in the division could accelerate in the second half of the year, according to RBC Capital Markets. In a June 21 comment, Edward Aaron noted this could come from completion of acquisitions in the pipelines as well as “…meaningful new business wins.”

If there’s a reason for caution here, it’s that SunOpta has several very large customers, including Dean Foods Company (NYSE: DF), Unilever UK Foods, and Novartis AG (NYSE: NVS). A loss of any one of these could significantly impact results. SunOpta’s sales also are heavily concentrated on soy-based products, exposing it to both crop-yield risks, and dependence on continuing evidence that soy is in fact a healthy product.

Alternative fuels

Ethanol is getting loads of good press these days, along with serious funding. But ethanol made from crops such as corn is problematic, since the crop is already in demand for human consumption and animal feed, leading to prohibitively high input costs.

However, SunOpta’s steam explosion technology allows waste biomass such as corn stalks or wheat straws to be separated out into its components including cellenol, which can then be used to produce cellulosic ethanol. Currently, four major ethanol production companies – in Europe, China, the United States and Canada – are building or are operating pilot facilities using SunOpta’s technology.

SunOpta also recently announced completion of a financing for the subsidiary, removing the uncertainty that had been growing recently over its delay. The company raised $30 million, some of which will be used to fund SunOpta’s interest in a joint venture in a proposed test plant looking at converting wood chips to ethanol.

As Canaccord Capital pointed out in a recent report, this gives an implied value of SunOpta’s ownership in the Bioprocess group of $3.13 per share, and “…provides investors with a tangible expectant of this subsidiary’s value to STKL’s shareholders.”


SunOpta holds a 70.6% ownership of Opta Minerals Inc. [TSE: OPM]. Opta Minerals processes, sells, and distributes abrasives and other industrial minerals. In June, with Opta Mineral’s market cap at C$92 million, Desjardins Securities put a value per SunOpta shares at US$0.96. Most analysts see the business as being a non-core holding, and one that will be divested of entirely at some point. “The timing of such disposition will be opportunistic, taking into account the objectives of both Opta Minerals and SunOpta,” wrote Desjardins analyst Keith Howlett. “Proceeds of [the] disposition will be reinvested in the natural and organic food business.”

Canaccord is forecasting 43% average annual EPS growth for SunOpta through 2008, and has a 12-month price target of US$14, using a 12X 2008 EBITDAY estimate of US$67 million, which it says is consistent with the peer group’s multiple of current year EIBTDA, plus …” a private value per STKL share of $3.13 for its Bioprocess Group, discounted 25% for illiquidity…”

Interestingly, while revenues tripled from 2003 to 2006, reaching US$598 million, the company has been able to convert that into earnings growth. For many analysts, that spells potential, as they also point to the company’s track record of successful acquisitions, as well as internal growth, which is seen to consistently be in the mid-teens. “We believe margins can only get better, as efforts by senior staff added last year to find cost savings and synergies bear fruit,” says Octagon Capital. Or, as Octagon Capital analyst Robert Gibson put it in a May report, “SunOpta is finally hitting on all cylinders.”

STKL 1-yr chart


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Tagged: , Processed & Packaged Goods, Canada
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