Rogers Sugar Strike Opens Door for Sweet New Issue on TSX Venture

By Will Ashworth

• Newly public Sucro Limited (CVE:SUG) is building an excellent alternative to the sugar duopolists.

• Production at behemoth Rogers Sugar (TSE:RSI) is hobbled by months-long strike

• Sucro’s new refinery puts it in an excellent position to service both the U.S. and Western Canadian markets. 

• Wednesday Q3 results should show what’s in store for investors.

Sucro Limited (CVE:SUG) is building an excellent alternative to the sugar duopolists in Canada and the U.S. 

Public for less than three months, it’s come a long way from its founding in 2014.

Its proposed new refinery could be a game-changer in the North American sugar industry. 

Vancouver-based Rogers Sugar (TSE:RSI) faces a strike at its hometown sugar refinery that has continued for two months. The 138 striking employees have caused a sugar shortage in Western Canada. With the holiday season upon us, bakers are concerned that they won’t have enough sugar to maximize sales. 

“We've been doing things like lining up early in the morning at Costco and trying to get in first thing to see what's available there. And sometimes that works, and sometimes, you know, Costco doesn't have anything either,” CBC.ca reported comments from Le Gateau Bakeshop owner Tanya Muller about the shortage. 

“I'm worried we won't be able to fulfill our orders, which obviously isn't ideal for the holiday season.”

In October, Miami-based Sucro Limited went public on the TSX Venture Exchange, selling 1.36 million subordinate voting shares at $11 a share, raising gross proceeds of $15 million. 

Based on 6.7 million shares outstanding, Sucro currently has a $72.3 million market cap, about one-eighth of Roger Sugars, one of Canada’s largest sugar producers.

While Sucro doesn’t sell to Western Canada, the current strike at the Vancouver refinery is a sign that the country’s sugar duopoly with Redpath Sugar isn’t working. 

This provides Sucro with an opening here in Canada. However, with more than half its production headed to the U.S., it’s got plenty on its plate without this possibility.  U.S. sugar consumption ranks third in the world behind India and the EU, according to the UN’s Food and Agriculture Organization.

If you’re a Rogers Sugar investor, you might want to consider Sucro shares. 

Here’s why.

Rogers Shares Haven’t Delivered

There is no question that investors own Rogers stock because of the dividends. The company has paid a quarterly dividend of 9 cents since March 2011. Based on its $5.52 share price, RSI stock yields 6.5%. Even in this higher interest rate environment, that’s an excellent return if you're an income investor. 

If you’re a dividend investor, which is an entirely different kettle of fish, your objective should be to generate an above-average total return, which is made up of dividends and capital appreciation. 

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RSI stock has generated a 10-year annualized total return of 5.62%, 168 basis points less than the Morningstar Canada GR Index, which measures 97% of the Canadian equity market. 

As Canadian investors know, the S&P 500 index tends to outperform the Canadian index, except when oil prices are high and Canada’s energy sector generates outsized profits. Even then, you’re not sure to see outperformance. In 2021, when oil prices were above US$115, the Morningstar Canada GR Index delivered a 24.72% return, 217 basis points less than the S&P 500. 

If you’re investing in Rogers Sugar for any other reason than income, you’re doing yourself a disservice. It will not do more than 5-7% a year, dividends included. 

Sucro Has Come a Long Way

Sucro was founded in 2014 by CEO Jonathan Taylor. He believed there was an opportunity to create a fully integrated sugar company to compete with Rogers and Redpath in Canada, and Domino Sugar and United Sugars Corporation in the U.S.

It started by manufacturing liquid sugar from a plant in Hamilton, Ontario. In 2019, it spent $20.9 million (all Sucro financials are U.S. dollars, except for IPO details) on a micro granular sugar refinery at its existing Hamilton plant, the first new investment in Canadian sugar refining since Lantic invested $120 million in 2000 at its Montreal refinery. 

The Canadian operation was so successful that it began planning a U.S. business. It started operations in Lackawanna, a suburb of Buffalo, in late 2020, making liquid sugar. It acquired 12 acres and several buildings of an old Bethlehem Steel plant for just $250,000. It got the land cheap because it agreed to remediate any contamination. 

Given this plant's low cost of capital, its return on investment will be considerably higher than any of its competitors. By 2025, it expects an annual capacity of 210,000 metric tonnes (MT) of sugar, possibly expanding it to 350,000 MT at a total investment of $44 million.

Earlier this month, it said that to date in 2023, it has secured more than 130,000 MT of confirmed sales bookings for deliveries to be made within 2024. These bookings include repeat business from current customers as well as major new bookings with leading multinational food and beverage customers. The projected sales from Lackawanna in 2024 are more than double the current sales anticipated in 2023.

The plant opened in Q4 2022 and is already generating significant revenue. As the company stated in its IPO prospectus, its company-wide sales target in fiscal 2023 is 582,000 MT from its Hamilton and Lackawanna refineries, with the production sold in advance under forward contracts from June 30. 

In the six months ended June 30, its adjusted EBITDA was $16.5 million on $243.2 million in revenue. It expects 2023 adjusted EBITDA to be $39 million at the midpoint of its guidance, 73% higher than 2022. 

In 2022, Rogers’ EBITDA margin was 10.6% on $771 million in revenue. Sucro’s was 12.5% on $439 million.

The company is slated to report Q3 results on Nov. 29 after the markets close. Analysts polled by S&P Capital IQ expect earnings of 6 cents a share on revenue of $169.35 million. Gross margin is forecast at 9.5%. 

Sucro’s Proposed New Refinery

In February, Sucro announced that it planned to build a new refinery in Hamilton for $100 million, with a production capacity of 1 million MT. On Oct. 17, it entered into a lease with the Hamilton-Oshawa Port Authority for vacant land in Hamilton to build the new refinery. 

“Despite the steady market growth, overall refining capacity in both Canada and the United States has been stagnant for years,” CEO Jonathan Taylor said in its February press release. “In particular, the demand for sugar in the Ontario market is growing at what we believe is the fastest rate in North America.”

In addition to capturing more of the Ontario market, the refinery puts it in an excellent position to service both the U.S. and Western Canadian markets. 

Assuming everything goes as planned, the new refinery should be operational in 2025. It will gradually grow capacity as it grows its market share. 

The new refinery will refine conventional and organic sugar as it currently does at its existing refineries. Its SweetLife organic sugar brand has approximately 18-25% of the U.S. organic market. With the organic sugar market growing at 15% annually, the new refinery is ideally situated to increase its organic market share in both countries.

Sucro stock is worth a closer look if you're an aggressive investor. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. None of the above should be construed as investment or financial advice. Investing is inherently risky. Please perform your own due diligence.