TSX Commentary

Maple Leaf Foods (MFI) – $11.36 – Earnings Preview
Sector Perform, Above Average Risk, Price Target: $13.00
Maple Leaf will report its Q4 results on Wednesday. RBC CM is forecasting EPS estimate of $0.24, well ahead of the recall-depressed earnings of $0.05 reported in Q4/08 and just ahead of consensus of $0.22. Operating margins should benefit from incremental operating leverage as Maple Leaf continues to close the volume gap in its packaged meats business. RBC CM’s model assumes gradually increasing EBITDA margin estimates for the combined protein operations from 4.3% in 2008 to 6.9% at the end of 2011, which is more conservative than management’s stated goal of 8% – 9%. Each 50 bps improvement in margin could generate incremental EBITDA of about $18 MM or $0.09 / share, all else being equal. But given the capital required to achieve the significantly higher levels of profitability, the associated impact of higher depreciation and financing costs would imply far lower net earnings accretion. Despite ongoing drag from the U.K. business on the frozen bakery segment, consolidated operating margins in the Bakery segment continue to normalize, driven by the North American fresh and frozen bakeries and pasta operations, lower commodity costs and price increases taken during 2008.