Maple Leaf Foods president Michael McCainRyan Remiorz/The Canadian Press
Investors are betting Canada Bread Co. Ltd. shares will keep rising now that majority-owner Maple Leaf Foods Inc. has put its 90-per-cent stake on the block.
Canada Bread shares surged 8 per cent on Monday after Maple Leaf said it's looking at slicing off the bakery business behind the Dempster's and Tenderflake brands to focus on its meat division.
The move comes amid a review of operations at Maple Leaf, and following a restructuring at Canada Bread that has seen it cut costs to offset slowing sales, caused in part by a trend to gluten-free and low-carbohydrate diets.
Despite the challenges, bread is still a consumer staple and the business of making it is largely recession-proof. Canada Bread is particularly attractive because of its bargain valuation and because it faces only one major competitor in Canada, Weston Foods.
In addition, Maple Leaf has vowed that if it doesn't sell its stake in Canada Bread, worth nearly $1.6-billion before Monday's announcement, it will continue to invest in and grow the business itself. Profit margins are currently about 11.9 per cent, and Maple Leaf said it's on track to grow that beyond 12.5 per cent by 2015.
"Canada Bread shareholders are in a good position. In either scenario they win," said Colin Stewart, portfolio manager at JC Clark Ltd., which owns the stock on behalf of its clients.
The firm bought more shares on Monday, believing Canada Bread stock is cheap, and has room to grow.
One way to value Canada Bread is by looking at its enterprise value – the market value of all its shares plus the company's net debt – in comparison to its earnings before interest, taxes, depreciation and amortization.
It has an EV/EBITDA ratio of about eight, which makes its shares look inexpensive compared to most North American bakers. Counterparts such as U.S.-based Flowers Foods Inc. and Grupo Bimbo of Mexico trade at EV/EBITDA multiples of 11 or higher, according to S&P Capital IQ.
Any sale of Maple Leaf's stake in Canada Bread would likely take place at a valuation substantially above its recent levels, noted RBC Dominion Securities analyst Irene Nattel.
She pointed to the last two major bakery deals in North America: Grupo Bimbo's purchase of Sara Lee's U.S.-branded fresh bread business in 2011, and its acquisition of Weston's fresh bread business in 2008.
"Presumably, Maple Leaf would analyze sale potential with an eye to realizing value greater than the eight [times EBITDA] that Bimbo paid for both," Ms. Nattel said.
Maple Leaf president Michael McCain told investors in a conference call on Monday that a sale of Canada Bread would need to be at a premium that includes lost synergies between the meat and bread divisions, which the company in the past has pegged at about $65-million, as well as lost opportunities in the U.S. and U.K., where it has divisions.
Mr. McCain said the sale process will help it figure out whether to keep the bakery division or sell it.
"We believe that the business can deliver even higher levels of profitable growth. It hasn't reached its full potential. The only question is: 'What is the best path to realize this opportunity?'" Mr. McCain told investors.
Canada Bread shares hit their highest level, around $72, in mid-2008, before the recession hit. Since mid-2009, the stock has risen more than 70 per cent.
The shares are thinly traded, given Maple Leaf's ownership stake. Of the 10-per-cent public float, about 1 per cent is owned by institutions and the other 9 per cent by retail investors, according to S&P Capital IQ.
On Monday, more than 17,000 Canada Bread shares were traded, up significantly from its average daily volume of 930 shares over the past three months, according to TSX data.