Description

Sun-Rype is western Canada's largest manufacturer and marketer of juice-based beverages and all-natural fruit snacks (47% market share in apple juice/ apple drinks and 35% in fruit snacks in Western Canada).
The company has reduced its dependence on its premium brand name Blue Label apple juice and set itself up for future growth in a couple of ways. First, it has developed blended fruit juices that are apple based. These blended juices are produced in higher quantities in years when the availability of process grade apples in weak. Secondly, through internal R&D the company is developing “healthy” snack products. Its Fruit-to-go and Energy Bar are dried, apple based, snacks that are aimed at kids and adults respectively. These relatively new products have proven to be very well received with more sales growth very likely. The company is also developing new products aimed at benefiting from the long term trend to more nutritious food and snacks. In the last month or so it launched its newest product - a fruit and veggie bar – again aimed at capitalizing on the trend to healthy snack foods. These snack products are distributed throughout Canada. The US is a potential market for the snack products but the large marketing cost to successfully launch the products is currently prohibitive. Third, it fills in available production capacity by copacking products for other companies.
The company had a management shakeup about 2 years ago where it got rid of a lot of unnecessary senior management and replaced the CEO who had led it into a disastrous joint venture into China which was written off following the Asian crisis. The company's new management has proved to be moving in the right direction in many ways such as cost cutting (consolidated head office with the plant), improving morale and employee commitment by establishing a shareownership program, and simple things like putting a new coat of paint on the what was a tired looking factory. The company also just installed new juice packaging equipment that allows it to offer resealable tetra-pack products in a variety of sizes– these products are just coming into stores now.
Although it is in a very competitive market, its brand name allows it to charge a premium price (giving it some pricing power and better margins)and the capital requirements of the business are minimal (depreciation = capex) so substantial free cash is generated.
I estimate that the intrinsic value of the business is at least $110 million ($10.19/share) based on a discounted free cash flow analysis of $7.2 million growing at 6% for 10 years and then 3% thereafter, versus the current market price of $65 million.
With 10.82 million shares outstanding and virtually no LTD, the TEV is $6.00 * 10.82 = $65 million. The company is trading at estimated FY01 ratios as follows:
- P/E ratio ($6.00 / $0.52 ) = 11.5.
- P/S ratio $65 million / $100 million = 0.65
- EBITDA –maintenance capex = 12 – 1.2 = 10.8 million. Therefore TEV/(Ebitda-capex) = 6.0
- TEV/EBITDA = 5.4
- FCF is estimated at $6.9 million, so TEV/FCF = 9.4.

These ratios are relatively low for a company that should grow 5-10% for the next several years and with its strong brand names. I believe that the downside is very limited with a decent upside potential thus offering an attractive risk-return profile.

Catalyst

There are several potential catalysts:

1. Takeover. The company recently removed a restriction that made a takeover of the company unlikely. Jim Pattison, a well known businessperson in Western Canada who owns one of the largest supermarket chains in Western Canada has recently bought a 20% stake in the company, which is the maximum allowed before being required to make an offer to all shareholders. The market capitalization of the company is small enough that I suspect Mr. Pattison could easily launch a takeover bid at any time. Alternatively, the company is an attractive takeover candidate with the financial muscle to expand the market for the company’s products ie. the United States.

2. Dividend. With the free cash flow being generated, the establishment of a dividend would make the shares more attractive to mutual funds, institutional and private investors. The company has not paid any dividends to date, but has indicated that it would consider doing so in the next year.

3. Acquisition. The company’s strong balance sheet and free cash flow give it the financial flexibility to pursue a strategic acquisition that would help it’s product offering while capitalizing on its distribution channels and brand name.

4. New Board of Directors. At the last annual meeting in June, the 2 largest shareholders voted in their own directors, presumably with the idea of somehow surfacing the true value of the company.

5. New Products. New products will fuel growth and enhance the visibility of the company.

6. Share repurchases. The company has a share repurchase program under which it has repurchased shares in the past.

7. Analyst coverage. Presently no brokerage analysts cover the company – coverage would increase interest in the company.