Description

Short: SunOpta, Inc. (NASDAQ: STKL)
Current Price: $6.89 | Target Price: $4.38 | Market Cap: $817.13M | Downside: -28.2% | r/r: 2.57x

Investment Summary:

Plant-milk producer trading at ~20x my estimate of 2025E EBITDA in an industry experiencing a significant inflection. Despite years of elevated capex, IPOs, and undersupply with weekly oat milk sales growing 4000%+ from 2018 to 2022, the market has failed to consider the implications of the capital cycle at work. I believe that I'm ahead of the information curve…management has already taken eerie steps to hide behind poor results including ceasing disclosures, accounting misstatements, a credit rating scare, and board resignations…all of which the sell-side completely fails to consider as near-term risks. Consensus has taken guidance at face value, allowing attractive entry into a short position (7% short interest) at a unique time where the stock is priced for significant FCF inflection ($35-$45M in 2024E FCF) – what I believe to be “priced for perfection.” The hurdle has been set high as quarterly cash burn has averaged  -$15M over the last 12 quarters and STKL has NEVER generated even $30M of annual FCF. I see ~28% base case downside to current prices on $56M of 2025E EBITDA, driven by a loss of pricing power and structurally lower volume growth in the NTM, paving the path for a midyear guidance cut and a subsequent re-rating down to pre-divestiture valuation levels…a situation worth "crying over spilled milk."

Why This Opportunity Exists:

• History of consistent divestitures has made it difficult for the market to value this stock.

• We are at inflection point where supply is expected to outstrip demand as a result of enormous levels of capex and capacity entering the space throughout pandemic era

• Eerie management lack of disclose for price/volume in the latest Qtr strengthens conviction in deteriorating fundamentals

• Uncomfortably Over-Levered Business...any turnaround failure poses significant risk to the equity + risk of non-compliance with nearing covenant levels. There is VERY little room for error in the fundamental story. One small slip up from management can cause not only a significant cut in guidance, but a potential restructuring event (technical default, out-of-court restructuring, press release on RX advisory).

Company/Industry Overview:

SunOpta is a food and beverage manufacturer, historically involved in beverages, broth, sunflower seeds, fruit-based snacks, and plant-based milk products. With high exposure to commodity and capital-intensive segments, the business has historically been a choppy grower (-3.85% 5Y sales CAGR), consistently unprofitable (0.2% avg. EBIT margin over last 11 quarters), and FCF-negative business (CFO-capex ranging from -$70M to $25M across the last 5Y). Numerous divestitures and asset sales over the last 5 years have been completed in order to diversify away from these unattractive segments.

A comprehensive timeline of divestitures & rationales:
Feb 25, 2019 – specialty and organic soy and corn divestiture
- Simplify the business & exit businesses or product lines where the company is not strategically positioned to drive long-term growth
- Reduces debt and redeploy capital to consumer products
April 2, 2019 – organic oils acquisition
- Diversify global oils desk
- Provides access to high-end specialty markets
Nov 10, 2020 – global ingredients segment divestiture
- Lower commodity trading exposure
- Increase financial flexibility to enable accelerated growth in plant-based beverage platform
April 15, 2021 – plant-based brands Dream and WestSoy acquisition
- To complement innovation initiatives and co-manufacturing business
- Synergistic acquisitions
Oct 13, 2022 – sunflower and roasted snacks divestiture
- Further focuses on value-added plant-based foods and beverages
- Low commodity trading exposure, while enhancing long-term growth rate and margins
Oct 13, 2023 – frozen fruits divestiture
- More capital efficient business models, strengthens BS, and ensures singularly focused on the most attractive growth opportunities
- Slow growth

Market View:

After its series of divestitures to diversify away from “commodity” businesses, SunOpta has just recently received “pure play” plant milk status with the completion of its final divestiture in Q4 ‘23…the frozen fruit business. Plant-based milk has experienced explosive growth over the last few years, fueled by a surge in veganism and health-consciousness. From 2020 to 2021, competitors including Chobani, flooded the market to take advantage of increased demand, investing millions into capex and boosting capacity to over a billion liters of plant milk. Further, mega Swedish competitor Oatly listed shares in the U.S to take advantage of the American surge in plant product popularity. Since announcing its final divestiture into becoming a pure play plant-milk business, SunOpta stock has more than doubled its market cap from $350M to ~$820M. Management has put on a facade that the business is undergoing a turnaround story with a transition to a high-growth “asset light” business model, guiding for $35-$45M of FCF in 2024 (a first-timer).

Variant Perception:

Point 1) Capital Cycle Inflection - Supply Side 

The plant-milk industry was catapulted by the COVID pandemic, catalyzing major competitors to enter the space to meet outlandish consumer demand. In Mid-March 2020 when stay-at-home orders were issued, plant-milk sales spiked to 75.3% during that week, driven by consumer propensity to become accountable for their health and adopt health consciousness. As a result, competitors rushed to enter the market, riding the capital cycle by increasing capex to boost capacity, benefitting off price/volume trends, and enjoying capital investment into the space.

We are at a unique inflection point in the capital cycle where the plant-milk industry is soon to lose its supply-constrained status. My research on manufacturing capacity from the largest plant-milk packers points to the industry’s undersupplied status fading in the next 12 months.
Calling every major co-packer of plant-based milk (displayed below), in order to get a sense of industry supply, arrives us at ~1.247B liters of plant-based milk.

After years of dedicated capital expenditures across major competitors such as Oatly, Chobani, Danone, and SunOpta to boost capacity in an undersupplied market, TOTAL SUPPLY of plant-based milk now sits at 1,247M liters. In order to sanity check my supply numbers, I also ran a square footage method where I took the manufacturing capacity per unit of square foot of space and apply that multiplier to the size of the facilities, on a per-brand basis → I arrived at a very similar number on total industry supply, confirming my belief that the capital cycle is turning.

After 2 consecutive years of demand slowdown, TOTAL DEMAND now sits at 1,278M liters (Source: National Milk Federation), a measly 2.5% spread to my supply numbers.

Key Catalyst:

My primary research has shown that the recent completion of SunOpta’s largest plant-milk facility (“Midlothian plant”) in Q1 ’23 pins the market at industry demand. However, the straw that breaks the camel's back has yet to occur…introducing the KEY catalyst —-> Management’s Q1 ’24 plan to ramp up the third manufacturing line (Line 3) at the Midlothian adds an incremental 80M liters, officially tipping the market into oversupply. On top of the 80M excess, the planned additions of Lines 4 and 5 of the Midlothian throughout FY2024 add an incremental 133M liters, setting the market at 14% oversupplied and introducing significant risk to prices in the near term.