Maple Leaf Analysis

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Executive Summary

Maple Leaf Foods Inc., one of the successful food processing company in Canada. The industry is mature at the current stage with stable price, demand and revenue in the past few years. Base on Porter’s five forces, Maple Leaf holds a competitive position in the industry: The established distribution channel and high standard government restricted policies both take effect into lowering the threat of new entrants; Relative high risk of substitutes; Medium degree of industry rivalry due to the competitive advantage of the company; High bargaining power of buyer but extremely low bargaining power of suppliers. Such strong position protects Maple Leaf Foods Inc. from operating risks. Moreover, the value chain analysis illustrated that the company has a high level of control over the supply chains and distribution channels. This report analyzes the operating strategy by comparing the asset and balance sheet of Maple Leaf and its competitors (Tyson Foods Inc. & High Liner Foods Inc.). The second part of this report focuses on capital structure research and quantitively analysis. The original capital structure (D/E ratio:0.0045) is significantly different from the industry average (D/E ratio:0.47). By using a scenario test of Increasing the debt by 50%, the result does not show a material change. The reason behind it is that previous debt amount is negligible. With the increase of the leverage, the return on equity increases and the overall weight average cost of capital decreases.

Maple Leaf Food Inc. has a low operating risk, and is situated in a low-operating-risk industry. It is relatively easy to issue debt. The issuance cost is lower compared to other high operating-risk companies. Moreover, Maple Leaf has low financial risk supported by high liquidity ratio and solvency ratio. This report strongly suggests that Maple Leaf Foods Inc. should issue $1.3 billion of debt. Not only because the debt finance cost is significantly low, but also better off the company in the future. After the debt issuance, the D/E ratio is the same as the industry average, and company could benefit from the tax shield (with reasonable assumption list in the report). As a result, the new WACC decreases from 5.88% to 5.05%.

Table of Contents

Business and Industry Environment        3

Introduction        3

Value Chain Analysis        3

Life Cycle Analysis        4

Asset Analysis        5

Porter’s Five Forces Analysis        5

Business Strategy Analysis        7

Comparison        7

Ownership Structure        8

Capital Structure and Financial Risk        9

Conclusion and Recommendation        13

Appendix A:        15

Appendix B        17

Appendix C – Capital Structure for competitors (High Liner and Tyson)        18

Appendix D        24

Reference        25

Business and Industry Environment

Introduction

Maple Leaf Foods Inc. stays in the food processing industry, which is the second largest manufacturing industry in Canada. The food processing industry accounts for 17% of total manufacturing shipments and 2% of the national Gross Domestic Product (GDP) (Overview of the Food and Beverage Processing Industry, 2016). Canadian food processing industry is a mature industry with steady growth and tracks underlying demographic trends closely.

Value Chain Analysis

Maple Leaf Food has two major value chains. The first value chain is vertically integrated, and the products are pork related. For Maple Leaf, vertical integration refers to the controlling over all aspects of the value chain, from hog production to meat processing and rendering operations, allowing for greater operational efficiencies. Staring from sow, nursery, finishing barns and nutrition, and then the value added by hog processing along with packaging and ingredients (Maple Leaf Foods Inc. 2016 Annual Report). Before the products delivered to the final customer, some of the raw and frozen pork are distributed to different channel with further processing. The rest of raw and frozen pork go to end customer directly (wholesale). The second value chain is poultry value chain, which is regulated by supply management. Starting with breeder barns and nutrition, the primary value is added from packaging and poultry processing. The product at this stage is raw and frozen poultry, and the customers are processors. The further processing performed by Maple Leaf Food Inc. also adds value to the product. It then been distributed to the retail customers. Other than that, the process of adding value to commodity type products is through a combination of additional processing and customer service. For example, Maple Leaf’s proprietary of 40 Steps to Food Safety program (Maple Leaf Foods Inc. 2016 Annual Report) is practiced across the entire meat processing operations to attain the highest operational standards for food safety excellence. Moreover, the collaboration between independent internal business units has driven more value chain thinking. The value accelerated when common purpose and trust amongst the players exist. In contrast, competition between internal business units for profit and/or resources can impede progress toward value chain optimization. Currently, Maple Leaf Food Inc. is facing the challenge of collaboration transparency, which means the relationships with suppliers is not always viewed as partnership and therefore the trust required for transparent collaboration is not perfectly present at this stage^[1].

Life Cycle Analysis

As the Maple Leaf Inc. approaches mature stage, the lifecycle curve tends to more flatter, which means slowing growth rate, as shown in the balance sheet, Maple Leaf Inc. experienced stable earnings from 2012 till today (Maple Leaf Foods Inc. 2016 Annual Report). Thus, the requirement for tax shield is high, Maple Leaf can benefit from tax shield, but can only use CCA to deduct the earning, the tax shield from interest paid is not considerable because Maple Leaf Inc. issued negligible debt. Second, the bankruptcy risk declines at this stage due to the ability to generate cash. The liquidity is sufficient, Maple Leaf Inc. has a quick ratio of 1.89x with industry average of 1.0x, which allow the company has enough cash for daily operation. Solid expectation of stable futures earning also protect the company from bankruptcy. Third, most of the company at the mature stage must consider the discipline of debt, but it is not a fact for Maple Leaf Food Inc., but a factor of it’s competitors. Forth, the distance between shareholders and managers enlarged by asymmetric information. Issuing equity or debt can be looked at with increasing suspicion. Finally, the cash flow are enough to maintain growth, collaterals are sufficient to cover the risk, namely the flexibility is not an issue thus the debt is considered to be cheap and safe(Maple Leaf Foods Inc. 2016 Annual Report).