2023-11-16 07:37:02 ET
Summary
- Rogers Sugar is sitting near 52-week lows despite adjusted net earnings being up 3.9% YTD with revenues up an even more impressive 7.8%.
- The current 6.9% dividend yield looks to be covered as seen from a long-term cash flow analysis and financial leverage looks healthy for a consumer staples company.
- The acquisition to enter the maple syrup business has not met expectations, leading to impairments, but the segment remains profitable with the potential to grow in the future.
Rogers Sugar ( OTCPK:RSGUF ) is the epitome of a consumer staples company as the leading sugar refiner in Canada dating back to 1888. Many consumer staple companies have taken a hit in the high interest rate environment and Rogers Sugar is one of them now down 21% from 52-week highs now yielding 6.9%. Since I last wrote about the company in August 2020, Rogers Sugar has achieved a total return of 29.1% compared to the S&P 500 return of 37.1%. This return is in large part due to the dividend as the share price increased only 5.5% over this time period. These are pretty good total returns for a boring consumer staples company and one I will be looking to add to my portfolio again in these uncertain economic times.
As a different kind of "energy" producer, Rogers Sugar powers personal energy levels across Canada and the maple syrup business gives the company scope to expand sales in that segment internationally. Rogers Sugar also continues to think long-term and expand its core sugar production footprint in the east of Canada to meet the needs of a growing population. This article will take a look at Rogers Sugar’s latest results, the maple syrup business 5 years after its acquisition, and the sustainability of the dividend.
Latest Results
In Rogers Sugar’s latest Q3 FY 2023 results , the company reported revenues of $262.2 million which was up 3.0% compared to the prior quarter with the 9-month YTD revenue of $796.7 million up 7.8%. This YTD revenue growth is nicely above the Canadian 3.8% rate of inflation and shows the company benefiting from inflation. However, volumes were flat in the Sugar segment at 579,807 metric tonnes but the Maple Syrup segment had volumes down 10% to sit at 33,508 thousand pounds compared to 37,225 in the prior YTD period.
Adjusted net earnings of $8.8 million ($0.08 per share) were up 3.9% with YTD adjusted net earnings of $32.2 million up 16.5%. Unadjusted net earnings for the quarter were even better at $14.2 million for the quarter and $39.9 million YTD. The difference with adjusted earnings is driven by gains/losses from financial derivative instruments that do not qualify for hedge accounting so run through the income statement.
Gross profits of $41.7 million were 67.1% higher compared to the prior year with YTD gross profits of $124.5 million up 21.7% compared to $102.3 million in the 2022 fiscal year. Gross margins of 14.4% in the TTM period have improved noticeably from 5-years lows of 13.0% in 2022. Selling, general, and administrative expenses remain in control despite the high inflation environment and are up only 3.4% on a YTD basis.
Management lowered the fiscal year 2023 volume outlook in the Sugar segment to 800,000 metric tons (down 5,000 metric tonnes) due to current market dynamics and the timing in orders from major customers. The current guidance continues to be roughly flat with an expected increase of 5,000 metric tonnes or 1% compared to the volume sold in 2022. The company has planned a 9% reduction in sales to the export markets for 2023, due to the growing demand and strong economics of the domestic market. As also announced by management, the company intends to mitigate poor market conditions with recently negotiated price increases, and newly implemented production automation initiatives.
Sweet Profits and Dividends
Rogers Sugar is nicely profitable with average return on equity and return on invested capital of 10.4% and 9.2% since 2010. The ROE figure is being driven down by impairments to goodwill for the maple syrup business in 2019 and 2022 of $50 million each effecting bottom line unadjusted earnings. We will discuss these in more detail next. Removing these two years, the average ROE jumps up to 14.1% which is more representative of the core sugar business in my opinion. This ROIC is well above a reasonable cost of capital and allows me to be confident that Rogers Sugar will be able to sustain its intrinsic value in the over the next decade and grow alongside the Canadian economy.
The maple syrup segment (L.B. Maple Treats Corp.) was acquired back in 2018 for a price of $160 million. While I was hopeful in my last article back in 2018 that this acquisition might be a way for Rogers Sugar to achieve growth outside its domestic market, it is looking more like the “diversification” outcome from an overpriced acquisition which was a term coined by legendary investor Peter Lynch to describe when a business expands for the sake of revenue growth and diversification only to reduce returns for the overall invested capital of the business.
At the time of the acquisition, the global maple syrup market was growing at 8% annually from 2010 – 2015 and L.B. Maple Treats had a leading 21% market share and 1,400 producer partners. Because of this, Rogers Sugar paid a hefty multiple to acquire the company. Unfortunately, the maple syrup business has not lived up to management’s expectations leading to the now cumulative $100 million of impairments. That is not to say the maple syrup business is unprofitable, just not as profitable as expected and what the company paid for.
As can be seen below, the maple syrup business generated $6 million of operating income and $8.3 million of adjusted EBITDA for the YTD period. On an annualized basis, this would leave the business generating $11.1 million EBITDA which based on a carry value of $60.3 million (after the $100 million of impairments) would now imply EV to EBITDA around 5.4x which is a much more reasonable valuation to carry the business at compared to the original $160 million purchase price. As such, I see little chance of further write-downs in the maple syrup segment. Time will tell if the 8% global growth in maple syrup consumption will allow the company to grow into the original purchase price over time.
Great Long-Term Cash Flows
Rogers Sugar is not only refining sugar, but great cash flows as well. To get an idea of the sustainability of the 6.9% dividends and a sense of free cash flow valuations, readers of my articles will know that I always like to look at what percent of cash flow from operations are available to be returned to shareholders after making the necessary capital expenditures, on a historical basis. As can be seen in the graph below, capital expenditures and acquisitions only used up on average 40% and 28%, respectively, of cash flow from operations since 2010. Keep in mind when looking at the graph that the fiscal 2022 and TTM period cash flows are being effected by inventory builds of $65.8 million compared to $0.2 million in the 2021 fiscal year. I am not worried about these inventory builds for a shelf stable product such as sugar and I expect them to average out in the coming year.
With average cash flow from operations of $54.7 million over the past five fiscal years, this 32% would imply free cash flow to shareholders of $830 million for around a 3.4% free cash flow yield at the current $548 million market capitalization. However, the acquisition to enter the maple syrup market was generational and not one that I would expect to repeat itself every business cycle. If we exclude acquisitions from the free cash flow analysis which were next to in the other years, this raise the free cash flow yield to 6.4% approximately covering the current dividend yield we see today.
Growing But Healthy Debt Load
The debt load at Rogers Sugar has steadily climbed over the past decade to reach new all time highs of $447 million in the latest quarter. That being said, it grew from a low level and financial leverage remains a healthy at 3.3x with interest coverage levels 3.86x in the latest TTM period. These are comfortable levels for a consumer staple company like Rogers Sugar. It is important to note that these total debt levels include purchase obligations for raw cane sugar and maple syrup which were $73.3 million in the latest fiscal 2022 year.
Risks from Protective Duties
Rogers Sugar is exposed to a material amount of risk in the continued status-quo protective duties on dumped and subsidized sugar from other countries. Duties were put in place by Revenue Canada back in 1995 and are open for review every 5 years. If these duties were not to be renewed in the future, it could open up Rogers Sugar to a significant level of competition from foreign businesses which would have an adverse effect on the business. In the most recent 2021 review, these protective duties were renewed as outlined below in Rogers Sugar latest annual report.
In August 2021, the CITT concluded its fifth review of the 1995 findings and issued its decision to continue the duties for another five-year period against (i) dumped sugar from the US, Denmark, Germany, the Netherlands, and the UK, and (ii) subsidized sugar from the EU.
- 2022 Annual Report
Takeaway for Investors
Rogers Sugar is a great consumer staple company for an uncertain economy that currently yields a hefty 6.9% dividend. The company is sitting near 52-week lows despite adjusted net earnings being up 3.9% YTD with revenues up an even more impressive 7.8%. While it might not be an exciting business that makes the front headlines often, this consumer staples company continues to grow and looks set to grab spot in my portfolio once again.
For further details see:
Rogers Sugar: A Safe 6.9% Dividend Yield In Uncertain Times