Rogers Sugar Inc.

• Market-leading position in the Canadian refined sugar market provides a strong defensive base and generates reliable cash flows.
• Recently acquired market-leading position in the global maple syrup bottling and distribution market provides a complementary growth component (internal and potential future acquisitions) to the legacy sugar business.
• Attractive dividend is sustainable.

Rogers Sugar is a leading Canadian refiner, processor, distributor and marketer of sugar products (granulated, icing, cube, yellow and brown sugar, liquid sugar and specialty syrups) through its Lantic subsidiary. Moreover, the company entered the maple syrup bottling and distribution market in 2017 through two acquisitions. 2018 will therefore be the first full year of the "new" Rogers Sugar. In our opinion, maple syrup is a welcome addition to Rogers Sugar's product portfolio as it brings a compelling growth platform, both organically and via potential further consolidation of a relatively fragmented market, in addition to revenue and cost-synergy opportunities.

From having no presence in the global maple syrup bottling and distribution market in the first half of 2017, we estimate that Rogers Sugar has now accumulated a leading 25–30% share via the acquisition of LB Maple Treat and Decacer in August and November 2017, respectively. We highlight that maple syrup consumption is increasing at a strong pace as per capita consumption rises and new markets are developed. Maple syrup offers not only healthier organic growth prospects than the mature Canadian refined sugar market, but also a larger number of M&A opportunities. In 2018, we expect Rogers Sugar to focus on integrating its recent acquisitions while also remaining on the lookout for other potential bolt-on M&A.

The bulk of Rogers Sugar's business (75–80%) remains refined sugar, where the company has a ~55% share of the duopoly-like Canadian market and generates reliable cash flows. Although growth in the Canadian sugar market is relatively muted, Rogers Sugar is expected to achieve its fourth consecutive year of sugar volume growth in fiscal year 2018 (FY18), with guidance calling for a 1.4% increase.

Our forecast calls for adjusted EBITDA to rise by 28% year-over-year to C$107.2m in FY18, driven in large part by the contribution from the recent acquisitions in maple syrup and related synergies. While an upcoming project related to air emissions standards compliance at the Alberta facility will require additional capital expenditures, we view Rogers Sugar's attractive C$0.36 dividend (5.9% yield) as sustainable based on our estimated payout of 83% in FY18 and 75% in FY19.

We view Rogers Sugar's valuation as compelling and, in our view, the company's recent significant entry into the higher-growth maple syrup market warrants a slight premium over its historical average of 9.5x EBITDA. Our C$7.50 target is derived from 9.75x our estimated 2019 EBITDA. We have a Buy–Average Risk rating on Rogers Sugar.