Maple Leaf Foods, Inc. (MFI) is a long.  The company’s large previous and future planned investments in shuttering outdated, non-scalable facilities, in conjunction with its capital program for construction of a modern pork processing and bakery facility, will improve operational efficiencies.  Additionally, Maple Leaf has attracted a well-respected Canadian activist investor with a history of creating value for shareholders.  The company currently trades at 5x 2013 EBITDA and 9x 2013 EPS.  After the restructuring plan’s implementation, we believe that the company can earn closer to $1.75 (ie trading at less than 7x EPS).  Using a 12 multiple (in-line with branded food companies) on $1.75 in earnings, we can derive ~$20 stock, or ~$17 when discounting it back to today (45% upside).  After the plan’s success, we would not be surprised if West Face pushes to sell the company or break it up into its two main units which could provide further upside to investors.

Company Overview

Maple Leaf Foods Inc. operates as a consumer packaged food company in Canada, the United States, the United Kingdom, Asia, and Mexico.  The company operates through three segments: Meat Products Group, Agribusiness Group, and Bakery Products Group.  The Meat Products Group segment offers value-added processed packaged meats; chilled meal entrees and lunch kits; and fresh and frozen pork, poultry, and turkey.  This segment sells its products primarily under the Maple Leaf and Schneiders, Maple Leaf Prime Naturally, Shopsy’s, Mitchell’s Gourmet Foods, Larsen, Parma, and Hygrade brand names.  The Agribusiness Group segment supplies hogs for slaughter; and recycles various animal and poultry by-products, including bones, trim, fat, offal, and feathers into a range of commercial tallow, edible lard and protein products, and biodiesel.  The Bakery Products Group segment produces fresh and frozen par-baked bakery products, including breads, rolls, bagels, artisan and sweet goods, sandwiches, and fresh pasta and sauces.  This segment sells its products under the Dempster’s, Ben’s, POM, Bon Matin, Chevalier, Olafson’s, Grace Baking, California Goldminer, the Wholesome Harvest, and New York Bakery Co. names.  The company serves wholesale, retail, and foodservice customers.  The company was founded in 1927 and is based in Toronto, Canada.

 MFI is the market share leader in Canada in bacon, wieners and sausages, prepared, sliced, and deli meats.  MFI also maintains a strong position in its bakery business through par-baked and commercially-branded bread operations.  MFI sells its products to supermarket chains and discounters.  The company reports in three lines: the Meat Products Group, the Agribusiness Group, and the Bakery Products Group.  The Bakery Products Segment operates largely through MFI’s 90% ownership stake in Canada Bread (TSX: CBY) which it achieved by purchasing 56,700 shares for cash consideration of $2.7CAD million in 2010 ( (Maple Leaf Foods).  The national fresh bakery business in Canada is essentially a duopoly with MFI and George Weston (WN CN) the two main players.

 Value Creation Plan

We believe that Maple Leaf’s Value Creation Plan is credible and working.  The plan was designed in 2009 with the help of BCG, the well-respected consultancy.  The plan is to consolidate a fragmented manufacturing base, improve manufacturing and processing to ‘best practices’ with implementation of ‘off-the-shelf’ modern technology.  The company has shuttered bakery facilities that were over one hundred years old, and has finished construction on a new ‘mega-scale’ bakery in Southern Ontario which will improve operating efficiency, contribute to food safety, and be able to increase MFI’s capacity to deliver baked goods and related products.  Baking lines are in the process of being moved from some of the older facilities to the new Hamilton facility.  All told, the company expects to spend CAD $757 million above its normal base investment through 2013.  We believe the company’s investment strategy will come to fruition, resulting in EBITDA margins that increase from 7.3% in 2010 to 12.5% in 2015.  We believe the return on this investment is around the mid to high teens. 

CEO and Management Team Has a Significant Ownership Stake

In 2010, MFI appointed Neil Boland to the Board of Directors.  Mr. Boland is the CEO of West Face Capital which acquired an 11.4% “activist” position.  MFI management decided to work with Mr. Boland to implement the Value Creation Plan which has been in process for fiscal year 2011 and will continue into 2012.  Approximately 45% of the Company’s shares are held by members of the Board, Management, and affiliates.  We believe this significant ownership stake will incent management to deploy capital efficiently and to enhance value to the shareholders.

 Risks to the Thesis

MFI has already spent—and intends to spend—a significant amount of its operating cash flow to restructure its facilities via its “Value Creation Plan.”  These operating efficiencies may not be realized. 

In 2011 MFI earnings suffered from input price inflation from wheat, milk, and butter which depressed top line revenue and margins. 

The strength of the Canadian dollar affects the value of the company’s hog production operations as the value of swine on the hoof is pegged to US Mercantile Exchange values.  Of more concern is the longer-term strength of the Canadian dollar which makes U.S. pork product exports into Canadian retail chains more attractive.  Recently this has turned into more of a tailwind. 

One issue the company has recently faced is that there has been a big pickup in “Gluten-free” diets, which has impacted bakery volumes industry-wide.  This seems to be a fad and volumes seem to be slowly normalizing.