Cascades Inc. (TSX: CAS) is a paper and packaging company that produces, converts and sells packaging and tissue products composed primarily of recycled fibers. The Company operates through four segments: Containerboard, Boxboard Europe, Specialty Products (which constitutes the Company's Packaging Products) and Tissue Papers. Under the Containerboard segment, it manufactures containerboard and converter of corrugated products in North America. The Boxboard Europe segment is engaged in manufacturing coated boxboard in Europe. The Specialty Products Group manufactures industrial packaging, consumer packaging products and is also involved in recovery and recycling. The Tissue Papers segment operates units that manufacture and convert tissue papers for the Away-from-Home and consumer products markets.

Revenue mix

Product Mix                                                     Geography Mix

                                                                                  

Investment Rationale

• Packaging Products/Boxboard Europe Moving Well: During the first quarter of 2021, shipments of recycled boxboard increased by 42,000 s.t., or 16%, compared to the prior quarter, while shipments of converted boxboard also increased 1,000 s.t., or 20%. These increases were primarily a reflection of higher shipments in Western Europe and the usual seasonal production shutdowns taken during the holidays in Q4 2020. Further, on a sequential quarter basis, higher sale reflects the increase in shipment volumes as discussed above, slightly offset by the 2% appreciation of the Canadian dollar compared to the Euro.

Source: Company Presentation

• Improving Capacity Utilization - Implies Lower Per Unit Cost: The capacity utilization rate is an important indicator for companies because it can be used to assess operating efficiency and provides an insight into cost structure. It can be used to determine the level at which costs per unit will go up or fall. When there is a rise in output, the average cost of production decreases. It means that the higher the capacity utilization, the lower the cost per unit, allowing a business to gain an edge over its competitors. In case of Cascade, the capacity utilization regained its pre-COVID level at 91% at the end of the Q1FY21. Also, a higher capacity utilization would bolster Cascades’ margin profile and profitability in the mid-term.

Source: Company Presentation

• Strong Financial Risk Profile: Cascades risk profile continued to remain strong, with healthy cash-flow expected in fiscal 2021. Also, the debt protection metrics has significantly improved with Net Debt/Adjusted OIBD stood at 2.5x, which is well below the standard 4x and interest coverage ratio of 6.5x. The above debt protection metrics shows less balance sheet risks for the company.

Source: Company Presentation

• Provider of Essential Daily Products to its Customers: As a producer of innovative, eco-friendly tissue and packaging solutions, CAS’ products play a vital role in the everyday lives of businesses, families, and individuals. The importance of this role was heightened in 2020 and continuing in 2021 as well, as apprehensions related to the pandemic led to an even greater need for these essential products. The substantial investments made in the platforms, equipment and technology over recent years meant the group was well prepared to meet the changing needs of the customers throughout the year. In addition to reinforcing the resiliency of its operations and the quality of the products, the strategic investments have equipped the Cascades to be a reliable and essential partner for its customers not only during periods of great need but every day. 

• Yielding Higher Than Risk-Free Rate- Provides Holding Power: Cascades Inc is offering a higher dividend yield compared to the risk-free rate of 1.56% on the Canada 10-Year Government Bond Yield. At the last closing price, the shares were yielding ~2.4%.  Given the current market conditions where lower interest is expected to remain in place for an extended period, Cascades Inc. is offering a decent yield. Further, the company has a consistent track record of dividend payment over the past five years. 

• Stable Outlook: In light of continued uncertainty regarding the COVID-19 pandemic, the group is maintaining a cautiously optimistic view for the near-term performance. Sequential results from the Tissue business are expected to remain stable, with performance over the longer-term is expected to improve as consumer tissue demand normalizes once inventories are re-balanced. Away-from-Home demand increases as the economy and businesses reopen, and benefits are realized from the high single-digit price increase announced for consumer and Away-from-Home tissue products beginning in the third quarter. We expect near-term Containerboard performance to reflect good demand and cumulative benefits from announced price increases, counterbalanced by raw material price inflation and planned maintenance downtime at two Niagara Falls facilities in the second quarter. Near-term results for the Specialty Products are forecasted to remain stable, with higher volume and average selling prices offsetting slightly higher raw material costs. Lastly, sequential performance from the European Boxboard segment is expected to remain stable as good volumes, and higher average selling price as a result of announced price increases should mitigate higher raw material costs.

• Risk Associated to Investment: The company is exposed to a variety of risks ranging from an increase in raw material prices, currency fluctuation risks, and general market condition. Further, rising crude oil prices could also have a weigh on the company’s margin profile.  

Financial Highlights: Q1FY21

Source: Company Filing

• Sales of CAD 1,182 million decreased by CAD 83 million, or 7%, compared with the same period last year. This was driven by lower volumes in the Tissue segment attributable to continued COVID-19 related market softness in the Away-from-Home segment and an important contraction in consumer retail product volumes as customers rebalanced inventory levels that had been built up in response to elevated Covid-19 demand. This was partially offset by stronger volumes in all packaging segments, most notably in the Containerboard segment, which benefited from strong demand on both the manufacturing and converting side.
• The Corporation generated an operating income before depreciation and amortization (OIBD) of CAD 128 million in the first quarter of 2021, down from CAD 157 million in the first quarter of 2020.
• On an adjusted basis, the first quarter OIBD totaled CAD 141 million, a decrease of CAD 16 million, or 10% from CAD 157 million generated in the same period last year. This decrease was largely attributable to lower Tissue results, which reflected difficult year-over-year comparisons following elevated Covid-19 related demand in the year-ago period and customer inventory management in the current period that impacted retail consumer demand levels.
• European Boxboard adjusted OIBD levels also decreased from the year-ago period, as material cost inflation more than offset the benefits from improved volumes. Good results from the North American packaging segments partially counterbalanced these headwinds.
• Results from the Containerboard segment increased 9% year-over-year, with higher volumes and beneficial selling price and sales mix mitigating the impact of higher raw material prices, while those of Specialty Products increased 50% compared to the prior-year period driven by higher volumes and better realized spreads.
• Results also benefited from lower SG&A costs as a CAD 10 million expected credit loss provision on accounts receivable amounts was recorded in 2020 in relation to the COVID-19 pandemic.
• For the 3-month period ended March 31, 2021, the Corporation posted net earnings of CAD 22 million, or CAD 0.22 per share, compared to net earnings of CAD 22 million, or CAD 0.24 per share, in the same period of 2020.
• On an adjusted basis, the Corporation generated net earnings of CAD 29 million in the first quarter of 2021, or CAD 0.29 per share, compared to net earnings of CAD 39 million, or CAD 0.42 per share, in the same period of 2020.
• The Board of Directors of Cascades declared a quarterly dividend of CAD 0.08 per share to be paid on June 3, 2021, to shareholders of record at the close of business on May 19, 2021.

Top-10 Shareholders

Top-10 shareholders in the company held around 42% stake. Lemaire (Laurent), and Letko, Brosseau & Associates Inc are among the largest shareholder in the company and carrying an outstanding position 12.18%, and 9.82% respectively. The institutional ownership in “CAS” stood at 33.37%, and ownership of the strategic entities stood at 18.19%.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation

The group has continued to focus on margin improvement, with several initiatives expected to contribute annually to the consolidated adjusted OIBD. The company is focused on advancing its Bear Island containerboard project and finalizing modernization investments in tissue converting operations.

Further, given the continued uncertainty regarding the COVID-19 pandemic, the group is maintaining a cautiously optimistic view of their near-term performance. Sequential results from the Tissue business are expected to remain stable, and near-term Containerboard performance is expected to reflect good demand and cumulative benefits from announced price increases, counterbalanced by raw material price inflation and planned maintenance downtime at two Niagara Falls facilities in the second quarter. Near-term results for the Specialty Products are forecasted to remain stable sequentially, with higher volume and average selling prices offsetting slightly higher raw material costs. Lastly, sequential performance from the European Boxboard segment is expected to remain stable as good volumes and higher average selling price because of announced price increases should mitigate higher raw material costs.

Further, the company is maintaining a robust risk profile with debt protection metrics that has significantly improved, with Net Debt/Adjusted OIBD stood at 2.5x and an interest coverage ratio of 6.5x.

Therefore, based on the above rationale, considering the risk associated and valuation done, we recommend a "Buy" rating on the stock at the closing price of CAD 13.41 on May 14, 2021.  

Technical Price Chart (as on May 14, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at May 17, 2021 price as well.

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