Credit Suisse has initiated coverage on Saputo Inc. (SAP.TO),
which is down 17 cents at $46.81, with an Outperform and $55 target
Canadian Cash Cow Prudently Reinvested: "By leveraging its
strong, stable base of operations in Canada, Saputo reinvests its
excess cash flow into higher-growth markets, primarily in the
Gaining Market Share in U.S. Natural Cheese: "Saputo's
double-digit US cheese volumes growth has exceeded the
low-single-digit growth in the industry. We see continued momentum.
The recent DCI Cheese Company, Inc., (
) acquisition provides a boost in U.S. specialty cheese sales and
should allow Saputo to grow its U.S. cheese sales by ~29% in fiscal
2012. We forecast ~14% U.S. revenue growth in fiscal 2013 as Saputo
continues to capitalize on organic/nonorganic growth opportunities.
The acquisition and consolidation of volumes has been a typical
modus operandi, but the latest U.S. acquisition in DCI is
different. Rather than cost synergies, we believe DCI is more about
trying to gain revenue synergies with low integration risk. DCI
provides Saputo upside into a new customer channel, U.S. club
Dividend Growth: "Saputo generates strong free cash flows and
current net debt/LTM EBITDA at 0.6x pro forma DCI is still under
levered. We also forecast the current dividend to grow from
C$0.64/share to C$0.74 in fiscal 2012 and C$0.85 in fiscal 2013.
Saputo has no explicit dividend policy, but targets a dividend
yield of 1.8-2.0%."
Valuation: "Our C$55 target price is the average of our SOTP and
DCF calculations. In our SOTP, we use a weighted average EBITDA
multiple of 12.4 times our fiscal 2012 EBITDA estimate. In our DCF,
we use a 7.5% discount rate and 2.5% terminal growth rate."
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