Maple Leaf Foods: Continuing To Perform Under The Radar
Summary
- Maple Leaf Foods delivered another great quarter and remains very undervalued.
- Their plant protein group is quietly growing and becoming a viable competitor in the burgeoning plant-based industry.
- Management is prudently investing in the future to spark growth while also delivering returns for shareholders in the form of increased dividends.
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In late February, Maple Leaf Foods (OTCPK:MLFNF) reported another great quarter with revenue of C$1.13B (+10.8% Y/Y) and Q4 GAAP EPS of C$0.20. MLFNF's meat protein group saw sales increase by 11.3% Y/Y and its plant protein group saw sales increase 5.5% Y/Y.
Additionally, MLFNF is in such a good cash flow position that it was able to increase its quarterly dividend to C$0.18 per share (up from C$0.16 per share). It's notable that MLFNF is still heavily investing in growing its brands through marketing spend and building its infrastructure through capital expenditures (projected to range from C$550 million - C$650 million in 2021). MLFNF is a rare dividend paying stock with plenty of upside growth potential.
Source: Q4 Earnings Call Presentation
Despite this continued growth and improvement, the stock has remained pretty stagnant over the past few years.
Operating Segments
As I've previously covered, MLFNF has been diversifying its product base. MLFNF was previously only operating in the meat protein industry, but through acquisition and launches of its own products, MLFNF launched a plant protein group. In December 2019, MLFNF finally began to break out reporting into these separate segments so investors could have more transparency into how well the plant protein group was faring.
Management has been able to quickly grow the plant protein group and revenue in the trailing 12-month period has quickly grown from C$147 million in Q1 of 2019 to C$211 million last quarter or ($167 million USD). To give readers a point of reference, Beyond Meat (BYND) had net revenue of $406.8 million in 2020.
Source: Q4 Earnings Call Presentation
To add further color to the comparison with BYND, BYND's market capitalization stands at roughly $8.7 billion while MLFNF's is only $2.5 billion and MLFNF has a very large and profitable meat protein group. Moreover, BYND reported a net loss of $52.8 million, while MLFNF reported net earnings of $20 million USD.
Future Growth in Plant Segment
In the first half of the year, MLFNF's plant protein group delivered robust 34% growth Y/Y (again, by way of comparison, BYND's net revenue grew 36.6% Y/Y). However, slower rates of growth were achieved in MLFNF's plant protein growth in the back half of the year, which was disappointing to investors.
Nonetheless, on the Q4 earnings call, management outlined why this growth was slower than expected and pointed to one-time reasons that are believable to me as an investor. First, management noted that they had issues with packaging in Q3. Not having the supply chain necessary to deliver the products that consumers demanded is certainly not great, but I'd rather invest in a company that has more demand in products than it can supply (especially if there are supply chain issues that can quickly be fixed). BYND and Impossible Meat saw many of these supply chain issues last year as well.
Secondly, two distribution segments saw less demand in Q4, in part due to an intensifying second wave of COVID 19. Specifically, as restaurants and venues had to either shut down or saw much reduced capacity, such as KFC and Dave & Busters, sales for MLFNF's products from those food retailers obviously sharply declined. Nonetheless, with these places opening back up as we continue to see declining COVID numbers, coupled with the launch of new products in certain restaurants, such as at Pizza Nova, I think this segment will quickly recover.
Source: Q4 Earnings Call Presentation
Finally, in the fresh meat department (consisting of burgers, sausages and ground meat), MLFNF did not have as robust sales as they expected and cited new entrants heightening competition, as well as COVID-19 impacts delaying innovation. Management has a plan to spur growth in this segment with a refreshed marketing campaign in Q2 of 2021 and acknowledged this setback on the Q4 earnings call, along with their plan to re-invigorate growth:
It is important to acknowledge that these products are appealing to a large set of consumers who are relatively new to plant-based protein and are still developing their motivations to purchase. Recall that as part of our renovation, we relaunched the Lightlife fresh line in the third quarter with new formulas and packaging, along with a new marketing campaign focused on Lightlife's fresh and clean ingredients. And while it's early days, we believe our simple, healthy ingredients provide a clear point of differentiation that will resonate with consumers over the long term.
Source: Q4 Earnings Call Transcript
On a positive note, its core branded retail products saw very robust growth and won a huge distribution deal with Walmart:
Two of the bright spots within the core offering were our Lightlife tempeh and our Field Roast Chao cheese items. As the largest North American tempeh producer, in recent years we have helped the category to realize absolutely exceptional growth as it gains recognition and expanding consumer adoption.
We do believe that there remains significant upside. And in November, we strengthened our partnership with Walmart USA by adding distribution to 3,500 stores, a tenfold increase. We have also had success with our Field Roast Chao cheese lineup. Chao has the number one SKU of plant-based cheese in North America with offerings in multiple formats, including slices, blocks and shreds. After early success in launching 5 new flavors and formats in Q3, we doubled our distribution with Walmart to over 2,000 U.S. locations in late Q4.
MLFNF has been innovating by launching new products and growing its distribution network of its plant based group and, as with most startups (and companies that innovate a lot), there were a few hiccups along the way with these launches. Nonetheless, management has prudent plans to continue to grow this segment and I remain bullish on their ability to do so. Once this segment sees stabilized growth (which I expect in the 2nd half of 2021), I believe management can unlock a lot of value for shareholders by spinning off this segment via an IPO or SPAC.
Infrastructure Projects
As noted above, management continues to invest in capex and during the quarter it invested C$191 million, including construction capital of $135 million (primarily related to the construction of their new poultry facility in London, Ontario). For 2020, MLFNF invested just over $491 million in CapEx, including approximately $192 million in construction capital and, despite COVID, these projects remain on track.
Conclusion
Maple Leaf Foods continues to deliver for shareholders, reporting robust growth, an increased dividend and prudent investments to spark future growth. MLFNF's plant protein group has seen some operational issues but is still seeing robust growth and management is quickly pivoting to address these issues. I remain bullish on MLFNF's future.
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Analyst’s Disclosure: I am/we are long MLFNF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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