High Liner Foods (HLF.TO) – August 2016

It has been over 3 years since I last reviewed High Liner Foods Ltd. To date, HLF.TO is still one of my favourite companies as it was as the first that I truly analyzed, and over the years it has been an impressive performer in my portfolio. At a high level, High Liner Foods is a supplier of quality seafood dishes and supplies to both the retail and commercial markets, here and in the US. They have operations throughout North America, and have grown over the years both organically and through acquisitions. Their own corporate snapshot best summarizes the firm:

High Liner Foods is the leading North American processor and marketer of value-added frozen seafood. High Liner Foods’ retail branded products are sold throughout the United States, Canada and Mexico under the High Liner, Fisher Boy, Mirabel, Sea Cuisine and C. Wirthy & Co. labels, and are available in most grocery and club stores. The Company also sells branded products under the High Liner, Icelandic Seafood and FPI labels to restaurants and institutions and is a major supplier of private label value-added frozen seafood products to North American food retailers and foodservice distributors. High Liner Foods is a publicly traded Canadian company, trading under the symbol HLF on the Toronto Stock Exchange.

Source: 2015 Annual Report

Analysis

From an analysis standpoint, HLF is an interesting company.  The company is headquartered in the maritime provinces, and pays and reports its dividend in Canadian Dollars, but since 2012 they have reported their financial statements in US Dollars.  This requires us to make some minute adjustments to EPS and Cash Flow per Share calculations, to ensure we factor in the appropriate exchange rate.  Moreover, this can swing the YoY growth metrics, since a shift in the USDCAD exchange rate can have a drastic effect on their bottom line due to foreign exchange gains or losses.

Below are the key evaluation criteria for HLF:

Category Criteria Threshold Current Value Pass?
Strong financial condition Current Ratio 2.30 1.50 YES
Earnings Stability Number of most recent years of positive EPS 9.00 3.00 YES
Earnings Stability Number of consecutive years of negative EPS 1.00 1.00 YES
Dividend Growth Compound Annual Dividend Growth 0.21 0.02 YES
Share Price Growth Compound Annual Share Price Growth 0.12 0.03 YES
EPS Growth Compound Annual EPS Growth 0.23 0.03 YES
Moderate P/E Ratio P/E 16.20 15.00 NO
Moderate P/BV Ratio P/BV 2.39 1.50
Moderate P/E*P/BV Ratio P/E * P/BV 38.72 22.50

And here is some of the fundamental data underlying the above evaluation criteria:

Year EPS Dividend per Share Dividend Payout Ratio (EPS) Dividend Payout Ratio (FCFS) ROE P/E Ratio Book Value Price to Book Value (P/BV) Net Income (000s) P/E × P/BV
F2005C ($1.9639) $0.1000 (5.0918%) 30.2774% (60.5188%) (2.3168) $6.4903 1.4021 ($41505.0000) (3.2483)
F2006C $0.1531 $0.1000 65.3106% 21.0671% 4.4303% 28.5734 $6.9121 1.2659 $3156.0000 36.1710
F2007C $0.2910 $0.1000 34.3585% 19.0414% 4.6450% 16.5780 $12.5316 0.7701 $6079.0000 12.7659
F2008C $0.4400 $0.1100 25.0003% 13.8824% 8.5031% 7.9547 $10.3490 0.6764 $13252.0000 5.3805
F2009C $0.5370 $0.1350 25.1377% 17.0828% 12.5713% 8.6120 $8.5439 1.0826 $19747.0000 9.3236
F2010C $0.6208 $0.1650 26.5784% 10.3864% 13.5665% 13.0878 $9.1520 1.7756 $19985.0000 23.2383
F2011C $0.6016 $0.1950 32.4117% 12.9113% 11.2551% 13.5880 $10.6909 1.5293 $18180.0000 20.7806
F2012 $0.0725 $0.2100 289.7152% 7.9876% 1.4365% 217.4934 $10.1433 3.1085 $2203.0000 676.0686
F2013 $0.5491 $0.3500 63.7394% 26.1210% 16.9814% 43.5613 $6.0805 7.8678 $31356.0000 342.7317
F2014 $1.1463 $0.4100 35.7677% 16.4163% 15.3827% 19.7682 $6.4234 3.5277 $30300.0000 69.7371
F2015 $1.3284 $0.4650 35.0042% 20.7587% 14.7522% 11.7057 $6.5064 2.3900 $29581.0000 27.9761

 

HLF’s share price was on a bit of a tear up until 2014, and it has been dropping since then.  I don’t necessarily see this as a bad thing – in 2014, they were trading at more than 3.5× book value, so a pull back from that price provides more buying opportunities.  Another important point is that in December 2013 HLF was added to the S&P Canadian Dividend Aristocrats Index.  The addition to this index would theoretically increase trading volume as the any ETFs based on the index would be buying and selling shares of the underlying companies, HLF being one of them.  This addition was short lived how however: it was removed in February 2015 because it did not meet the average daily value traded criteria1.

High Liner Foods - 10 Year Stock Price - 2005-2015

High Liner Foods – 10 Year Stock Price – 2005-2015

As a long term investor who is more interested in the continuous passive income from holding the company in my portfolio, rising or falling share prices do not necessarily spook me. Falling share prices are a good thing, since they give me more opportunities to add to my portfolio, provided the underlying fundamentals remain strong. That said, I am more interested in the company’s dividend, its dividend growth, and the margin of safety for the dividend vis-à-vis the ability of the firm to consistently pay that dividend.

HLF.TO - 10 Year Dividend, EPS, and Free Cash Flow per Share

HLF.TO – 10 Year Dividend, EPS, and Free Cash Flow per Share

HLF.TO - 10 Year Dividend Payout vs EPS and Free Cash Flow

HLF.TO – 10 Year Dividend Payout vs EPS and Free Cash Flow

2012 is one year that stands out when examining the  historic fundamentals for HLF.  Their EPS over 2011/2012/2013 went—on a split and currency adjusted basis—from $1.20 in 2011, to $0.14 in 2012, and back up to $1.10 in 2013.  The main reason for this was due to one time write-down charges due to some of their acquisitions in 2011 and 2012, which reduced their net income from $18,180,000 in 2011 to $2,203,000 in 2012.  This one time charge drastically reduced EPS, and helps to explain the huge spoke in the P/BV × P/E value for the same time period, illustrated in this graph:

High Liner Foods - 10 Year P/E × P/BV

High Liner Foods – 10 Year P/E × P/BV

Notice how in 2012 the P/E × P/BV spiked at almost 700, but then dropped down to ~350 in 2013, before returning back to more realistic levels in 2014 and 2015 of 69.7 and 28.0 respectively.  All that aside, if we were to naively look only at the dividend payout ratio relative to EPS we would be very worried; dividend as a percentage of EPS was 289.7% in 2012!  However, if we inspect dividend payout ratio to the free cash flow per share (green line in the Dividend Payout Ratio (vs FCF) graph), we see that the dividend has consistently been below 21.1% since 2006 (it was marginally higher at 30.3% in 2005).  Moreover, notwithstanding the drop in 2012, the EPS on a year over year basis has been generally trending upwards; 2012 was the exception, not the norm.

Recommendation

Over a 10 year time horizon, HLF has had positive dividend growth, EPS growth, and share price growth, with compounded annual growth rates of 15.0%, 27.1%, and 11.8% respectively.  Even taking into account the pull-backs since 2013 in the share price, and the EPS drop in 2012, the stock over a longer time horizon (e.g. 10 years) has been very strong. My recommendation criteria would place HLF as a HOLD, primarily because the P/E × P/BV multiplier is very high at 28.0, which is higher than our threshold of 22.5. However, given the relative strength of the dividend, and HLF’s impressive 15.0% compound annual dividend growth over the past 10 years, I would consider purchasing it even today, unless there were more suitable companies to buy on the open market. Either way, I would purchase on dips: purchasing at any price strictly than $13.95 on the open market would push us below the magic 22.5 threshold for P/E × P/BV, based on the F2015 EPS and Book Value.

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1. As per an email exchange with S&P Dow Jones Indices. Email me for more information or for a copy of the exchange.



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