Has Rogers Sugar Quietly Turned Itself Into a Growth Stock?

Fresh off saying I’d never talk about a low growth stock ever again (or something like that; you memory may vary) let’s fire up the ol’ substack and talk about the bondiest stock that ever existed. No, not Corby Spirits and Wine. Today we’re going to talk about Rogers Sugar.

Rogers traces its roots back to 1890s. B.T Rogers recognized that shipping sugar beets from western farms to refiners in Montreal didn’t make much sense. So he built a refinery in Vancouver, a pretty big deal for a small city that was wholly dependent on logging and fishing for industry. Rogers expanded to Taber, Alberta, in the 1950s, building a plant that is still in operation today.

Meanwhile, Lantic Sugar was quietly operating in Eastern Canada. By the 1910s it had a number of refineries in New Brunswick and Nova Scotia. In 1984 it acquired St. Lawrence Sugar, consolidating operations in Montreal.

It was a marriage that made total sense. After years of cooperating unofficially, Rogers and Lantic made it official in 2008 and merged. The combined company now operates under the Lantic name. Rogers is the holding company.

I first became aware of Rogers Sugar during the income trust days. Rogers was the perfect candidate. It was a low growth business that didn’t have a lot of capex needs. It generated fairly predictable earnings and could afford to pay out a large chunk of those earnings as a dividend. The distribution yield was north of 10%, a reasonable payout since the company wasn’t paying any corporate tax.

It was a solid, albeit unspectacular investment for years, and your author traded in and out of the name a few different times. Rogers followed a fairly predictable pattern. Something would happen that would push the shares downwards, and they’d usually bottom around $4 each. Then the market would get bullish again and the stock would slowly march higher. Shares would peak in the $6.50 or $7 range and it would be time to sell.

Seriously. Check out this chart:

Before anyone gets too excited, 1.6% CAGR is price only. If we add on the dividend, Rogers has been a pretty solid investment.

To hell with the false modesty. It’s been a pretty damned good investment. Especially if you put those dividends back to work.

Not a compounder though, right guys?

There are other things I like about the sugar business. Foreign sugar basically doesn’t exist in Canada, protections put in place mostly to protect sugar beet farmers. No matter how much we say we’re going to cut back on the stuff, consumption grows about as fast as the population grows. And sugar is one of those items the grocery store loses money on, subsidizing both the consumer and the sugar producer.

However, if you take another look at that chart, it looks like it might be time for Nelly to cycle out of his Rogers Sugar investment. It’s back flirting with an all-time high. And we all know the sugar business isn’t going to grow.

Except not. Maybe the sugar business does have some growth potential. Let’s take a closer look.

Rogers’ Stealthy Growth

Before we talk about Rogers’ growth plans, let’s take a quick look at the past five years for Rogers. If you’re anything like me, you’ll be pleasantly surprised at how much the company has grown the top line:

That’s an increase from $564M in 2016 to just shy of $900M over the last twelve months. It’s a pretty impressive result, actually. What did the company do to get there?

It expanded into the maple syrup business back in 2017, acquiring assets that included much of Canada’s private label syrup production. It has also expanded into the better for you sweetener category, releasing stevia, maple, and coconut sweeteners. Then COVID happened, and we all ate ourselves into a homemade baking coma, something scientifically proven to stave off all infections. Finally, the company has benefitted by 2022’s inflation-driven commodity boom, which boosted results nicely.

Let’s take a closer look at the company’s latest quarter. Revenue was $255M, compared to $211M over the same period the year before. Adjusted EBITDA was $23M. It was $17M in the same quarter in 2021. And perhaps most importantly, TTM free cash flow was a hair over $49M compared to $42M in the same period last year.

Those are excellent results. Especially for a company that has struggled to raise prices in the past.

The company made another interesting announcement. It plans to spend $160M to expand the output of its Montreal refinery by 100,000 tonnes. That translates into approximately a 13% increase in total production. This should be done by summer, 2024.

Management delved into a little more detail on the expansion during its quarterly conference call. They don’t anticipate having many problems selling this new supply. In fact, management said the new supply is “pretty much committed” to existing customers. The company has also been shipping product from Western Canada to Eastern Canada for years now, which hasn’t been cheap. They already know they can sell this extra production.

Naysayers might chime in about now and say that 10-15% growth over the next two years isn’t very exciting. But it’s just another example of how Rogers has been quietly boosting its top line. Will they come up with something after this plant expansion? Probably.

Valuation

I’ve always thought it was doubly important to buy a stock like Rogers Sugar when the valuation was attractive. You can get bailed out paying too much for a high growth stock. It’s a lot harder to get bailed out buying something like this.

The valuation is good, but not great. As mentioned, trailing free cash flow is approximately $50M. The current market cap is $670M. That puts us at just a hair over 13x trailing FCF, or approximately a 7% earnings yield. The dividend yield, meanwhile, is at 5.6%. Both of those are closer to the top end of the company’s valuation over its history. A patient investor can get in at under 10x FCF or closer to a 7-8% dividend yield.

The current share price is $6.50, which is much closer an all-time high. Of course, the business has grown significantly over the last five years. Perhaps it deserves to trade at a little higher valuation.

The bottom line

Your author has been happy to trade this name in the past, and it looks like now is the time to sell if I was looking to trade it again.

But I think I’ll hold this time. The company has done an excellent job growing what many considered to be a no-growth business. It has also been an excellent long-term performer if you reinvest the dividends. And Canada’s sugar business is protected from tariffs that restrict foreign producers from selling products in Canada. I wouldn’t put any new money into the stock today, but I’m happy to hold.

Disclosure: Author owns Rogers Sugar shares