The drawdown in the broader Consumer Staples sector has set up a compelling investment opportunity for SunOpta shares. We examined what parts of our investment thesis have changed and outlined the path for the shares doubling and tripling. We also detailed how the downside risk for SunOpta's shares has firmed considerably, setting up what we believe to be an asymmetric risk v. reward.
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The share prices of Consumer Staples companies have come under pressure in Quad 3. Higher interest rates, unit volume declines, growing private label share, the threat from GLP-1 drugs, and a weaker consumer outlook have driven a contraction in the sector's valuation multiples.
SunOpta recently announced a game changer - the sale of its frozen fruits business for $141M, including a promissory note of $20M. Included in the sale are the primary assets of the business, including two production facilities as well as the inventory. On a trailing 12-month basis, the business had revenue of $263M and EBITDA of $15M. On a forward basis, the business likely would have had losses if the interest expense for the inventory was netted against the income. The frozen fruit business was a drag in several ways – margins, growth, valuation multiple, and leverage. SunOpta’s leverage improves dramatically with the sale to just above 2x forward EBITDA. That provides capacity for a share repurchase plan or more growth capital and upside to the shares.
Previously, we speculated that the frozen fruit business would be sold. We have new predictions for what could be next.
The investment themes from our presentation are as follows:
