- Market-leading position in the Canadian refined sugar market provides a strong defensive base and generates reliable cash flows.
- Recently acquired market-leading position in the global maple syrup bottling and distribution market provides a complementary growth component (internal and potential future acquisitions) to the legacy sugar business.
- Attractive dividend is sustainable.
Rogers Sugar is a leading Canadian refiner, processor, distributor and marketer of sugar products (granulated, icing, cube, yellow and brown sugar, liquid sugar and specialty syrups) through its Lantic subsidiary. Moreover, the company entered the maple syrup bottling and distribution market in 2017 through two acquisitions. 2018 will therefore be the first full year of the "new" Rogers Sugar. In our opinion, maple syrup is a welcome addition to Rogers Sugar's product portfolio as it brings a compelling growth platform, both organically and via potential further consolidation of a relatively fragmented market, in addition to revenue and cost-synergy opportunities.
From having no presence in the global maple syrup bottling and distribution market in the first half of 2017, we estimate that Rogers Sugar has now accumulated a leading 25–30% share via the acquisition of LB Maple Treat and Decacer in August and November 2017, respectively. We highlight that maple syrup consumption is increasing at a strong pace as per capita consumption rises and new markets are developed. Maple syrup offers not only healthier organic growth prospects than the mature Canadian refined sugar market, but also a larger number of M&A opportunities. In 2018, we expect Rogers Sugar to focus on integrating its recent acquisitions while also remaining on the lookout for other potential bolt-on M&A.
The bulk of Rogers Sugar's business (75–80%) remains refined sugar, where the company has a ~55% share of the duopoly-like Canadian market and generates reliable cash flows. Although growth in the Canadian sugar market is relatively muted, Rogers Sugar is expected to achieve its fourth consecutive year of sugar volume growth in fiscal year 2018 (FY18), with guidance calling for a 1.4% increase.
Our forecast calls for adjusted EBITDA to rise by 28% year-over-year to C$107.2m in FY18, driven in large part by the contribution from the recent acquisitions in maple syrup and related synergies. While an upcoming project related to air emissions standards compliance at the Alberta facility will require additional capital expenditures, we view Rogers Sugar's attractive C$0.36 dividend (5.9% yield) as sustainable based on our estimated payout of 83% in FY18 and 75% in FY19.
We view Rogers Sugar's valuation as compelling and, in our view, the company's recent significant entry into the higher-growth maple syrup market warrants a slight premium over its historical average of 9.5x EBITDA. Our C$7.50 target is derived from 9.75x our estimated 2019 EBITDA. We have a Buy–Average Risk rating on Rogers Sugar.
- Strong consolidated EBITDA growth.
- Attractive current dividend yield of ~4.5% and the highest dividend growth among large caps in the industry.
- Solid increase in free cash flow due to deceleration of capital expenditure program.
TELUS is a Vancouver-based telecommunications company which offers a full range of wireline and wireless services. Its operations are focused on the western Canadian provinces and eastern Québec, and generate revenues in excess of C$13b per year. Over the years, the company has grown mostly through free cash flow (FCF) reinvestment rather than mergers and acquisitions (M&A), unlike its large-cap peers.
We expect TELUS's EBITDA growth to rank well in the industry in 2018, given the company's strong trends in subscriber metrics. TELUS forecasts EBITDA growth in the 4–7% range in 2018, vs 2–4% for BCE and 5–7% for Rogers. There are several reasons for this. First, the company has an attractive revenue mix, generating a large proportion of EBITDA from wireless, and a rather small exposure to the declining TV market. Indeed, the overall wireless market in Canada remains healthy due to favourable demographics and improving wireless adoption. Second, it continues to have a competitive advantage in its wireline footprint because of the high quality of its growing fibre network. Finally, the company has an industry-leading wireless churn, which is a good proxy for overall customer satisfaction. These factors more than offset the current pressure on the legacy home phone business as the company is able to sell wireless services to substitute for traditional phone services.
We expect TELUS to pay ~88% of its FCF in dividends in 2018, representing a solid improvement over last year's 112% in spite of its 7–10% annual dividend growth, which is unmatched among large caps. This expected improvement results from strong EBITDA growth, as well as the year-over-year reduction in capital expenditure deployment. The company had chosen to make massive investments in its fiber-to-the-home (FTTH) network during years when capital costs were historically low, which we believe was the right strategy. In addition to this top-quality wireline network, the company's network was recently named Canada's fastest, which should further support customer satisfaction. Net debt to EBITDA currently stands at 2.7x—a manageable ratio that we expect will start decreasing toward the end of 2018.
TELUS posted a strong wireless performance in recent quarters, which should support future profitability. We also note that TELUS has seen little to no impact from Shaw Communications' (its main competitor in western wireline) launch of a new TV product, which we view as a sign of the attractiveness of TELUS' products.
TELUS trades at a 0.4x discount vs BCE and in line with its Canadian telecom peers on an EV/FY2 EBITDA basis, despite its industry-leading EBITDA and dividend growth; we therefore believe there is room for multiple expansion. At current levels, TELUS's shares offer an attractive dividend yield of ~4.5%. Our valuation for TELUS is based on the average of a discounted cash flow and net asset value, which generates our target price of C$52.00.
|Company||Ticker||Price ($)||Market cap ($m)||Ratingfootnote 1||Target price ($)||Dividend yield (%)||Total expected return (%)||Sector|
|Manulife Financial Corporation||MFC||24.68||48,912||Buy-AAR||30.00||3.6%||25%||Life Insurance|
|Alimentation Couche-Tard Inc.||ATD.B||62.47||35,249||Buy-AR||78.00||0.6%||25%||Consumer Staples|
|Sun Life Financial Inc.||SLF||53.75||32,813||Buy-AAR||58.00||3.4%||11%||Life Insurance|
|TELUS Corporation||T||45.35||26,963||Buy-AR||52.00||4.5%||19%||Telecom, Media & Tech|
|Algonquin Power & Utilities Corp||AQN||12.76||5,507||Buy-AR||16.00||4.6%||30%||Power & Utilities|
|Uni-Select Inc.||UNS||22.94||970||Top Pick–AR||34.00||1.6%||50%||Consumer Discretionary|
|Transat A.T. Inc.||TRZ||10.72||416||Buy-AR||20.00||–||87%||Transportation & Aerospace|
- Target price change: UNS to $34 (from $37).
- AR: Average Risk, AAR: Above-average Risk
Source: Desjardins Capital Markets, Bloomberg, FactSet