Credit Suisse has initiated coverage on Saputo Inc. (SAP.TO), which is down 17 cents at $46.81, with an Outperform and $55 target price.
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 United States."
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., ( DCI ) 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 stores."
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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