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 boxboards 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.

Investment Rationale

• Provider of Essential Daily Products to its Customers: As a producer of innovative, eco-friendly tissue and packaging solutions, their 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 their essential products. The substantial investments made in their platforms, equipment and technology over recent years meant they were well prepared to meet the changing needs of their customers throughout the year. In addition to reinforcing the resiliency of the company's operations and the quality of the company's products, their strategic investments have equipped Cascades to be a reliable and essential partner for their customers not only during periods of great need but every day.

• Solid Packaging Product Performance: Shipments increased by 25,000 s.t., or 7%, in the second quarter of 2021 compared to the same period of 2020. Shipments from converting activities increased 14,000 s.t., or 8% and external parent shipments increased by 11,000 s.t., or 6%, compared to the same period of 2020. The manufacturing utilization rate increased by 4% on a year-over-year basis. The second quarter 2021 mill integration rate of 57% remained stable compared to the same period of 2020. Including sales to other partners, the integration rate was 74% in the second quarter of 2021, up from 71% in the same period of 2020. The average selling price in Canadian dollars increased by 3% for parent rolls and by 2% for converted products. The 13% average appreciation of the Canadian dollar compared to the US dollar had a net negative impact on average selling prices during the period.

• Increasing Capacity Utilization: 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 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 the case of Cascade, the capacity utilization regained its pre-COVID level at 90% at the end of the Q2FY21. Also, higher capacity utilization is likely to bolster Cascade's margin profile and profitability in the mid-term.

• Solid Performance of Specialty Products: Sales increased by CAD 11 million, or 9%, in the second quarter of 2021 compared to the same period of 2020. Volume increases, and to a lesser degree, higher average selling price and a favourable mix generated CAD 23 million of additional sales in the period. These were partly offset by an unfavourable foreign exchange rate which negatively impacted sales by CAD 12 million. Operating income before depreciation and amortization (OIBD) increased by CAD 2 million, or 13%, in the second quarter of 2021 compared to the same period of 2020. Excluding specific items, the adjusted OIBD increased by CAD 1 million, or 6%. This performance is a result of higher overall volumes and realized spreads, which positively impacted results by CAD 5 million. These were partially offset by an unfavorable exchange rate and higher operating and maintenance costs which negatively impacted results by CAD 4 million.

• Increased Shipment of Tissue Papers: During the Q2FY21, Shipments increased by 12% on a sequential basis in the second quarter. This reflects a 3% increase in shipments of converted products driven by Away-from-Home products, while shipments of retail products decreased sequentially. On the manufacturing side, shipments of parent rolls increased 43% from the first quarter, reflecting higher external sales that were driven by successful sales efforts.

• Robust Financial Risk Profile: Cascades risk profile continued to remain strong, with healthy cash flow expected in fiscal 2021. Also, the debt protection metrics have significantly improved, with Net Debt/Adjusted OIBD stood at 2.9x, well below standard 4x, which is considered stronger financial strength to manage debt and interest coverage ratio of 6.4x at the end of the Q2FY21. The above debt protection metrics show negligible balance sheet risks for the company.       

• Offering a Decent Yield Income Opportunity: Cascades Inc. yielding higher compared to risk-free rate of 1.15% on the Canada 10-Year Government Bond Yield. At the last closing price, Cascades Inc. shares were yielding 3.16%.  Given the lower interest environment, we believe that Cascades shares are offering a decent yield. Further, the company has a consistent track record of dividend payment over the past five years. Moreover, the quarterly dividend increased to CAD 0.12 per share from CAD 0.08 per share previously, resulting in an annual dividend of CAD 0.48 per share, from CAD 0.32 per share previously.

• Positive Outlook: Considering continued uncertainty regarding the COVID-19 pandemic, the group is maintaining a cautiously optimistic view of their near-term performance. Sequential results from their Tissue business are expected to remain stable, with performance over the longer term 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.
• Risk Associated to Investment: The company is exposed to a variety of risks ranging from an increase in the raw material prices, currency fluctuation risks, and general market condition risks as well. Further, rising crude oil prices could also weigh on the company's margin profile.

Financial Highlights: Q2FY21

• For the 3-month period ended June 30, 2021, consolidated sales totaled CAD 956 million, a decrease of CAD 64 million, or 6%, compared to CAD 1,020 million in the same period of 2020. Higher selling prices and volume in Packaging Products segments and in Recovery and Recycling activities had a positive impact on sales. However, this was more than offset by the sharp decrease in volume of all Tissue Papers markets following volatile buying patterns in both periods which led to a decrease of CAD 127 million in sales for this segment. The 13% appreciation of the Canadian dollar compared to US dollar had a net unfavorable impact on sales
• The Corporation recorded an operating income before depreciation and amortization (OIBD) of CAD 87 million in the second quarter of 2021, compared to CAD 127 million in the same period of 2020.
• On an adjusted basis, operating income before depreciation and amortization stood at CAD 98 million in the second quarter of 2021, compared to CAD 143 million in the same period of 2020.
• For the 3-month period ended June 30, 2021, the Corporation posted net earnings of CAD 3 million, or CAD 0.02 per share, compared to net earnings of CAD 54 million, or CAD 0.57 per share, in the same period of 2020.
• On an adjusted basis , the Corporation generated net earnings of CAD 8 million in the second quarter of 2021, or CAD 0.07 per share, compared to net earnings of CAD 58 million, or CAD 0.61 per share, in the same period of 2020.
• Net debt stood at CAD 1,707 million as at June 30, 2021 (compared with CAD 1,654 million as at March 31, 2021).
• Total capital expenditures, net of disposals, of CAD 65 million in Q2 2021, compared to CAD 71 million in Q1 20212 , and to CAD 36 million in Q2 2020.
• In the second quarter, the Boxboard Europe segment recorded a CAD 2 million loss from the sale of all the shares of its French subsidiary which produces virgin fibre-based boxboard. This amount is included in discontinued operations.

Top-10 Shareholders

Top-10 shareholders in the company held around 42.41% stake in the company. Lemaire (Laurent), and Letko, Brosseau & Associates Inc are among the largest shareholder in the company with an outstanding position 12.18%, and 9.84%, respectively. The institutional ownership in “CAS” stood at 33.37%, and ownership of the strategic entities stood at 18.19%.

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: In the mid-term, we believe Containerboard performance to reflect good demand and cumulative benefits from announced price increases, counterbalanced by raw material price inflation and planned maintenance downtime at their two Niagara Falls facilities in the second quarter.

Also, 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.

Also, the company has negligible balance sheet risk, led by robust debt protection metrics with a Net Debt/Adjusted OIBD ratio of 2.9x and an interest coverage ratio of 6.7x.

Moreover, its shares are offering a yield of more than 3%, which is quite decent given the lower interest rate environment. Also, on the daily price chart, the leading momentum indicator, the 14-Day RSI, is not coming below 40, which implies that its shares are not entering into a bearish zone.

Hence, based on the above rationale and valuation, we recommend a “Buy" rating on the stock at the closing price of CAD 15.20 on August 20, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

Technical Price Chart (as on August 20, 2021). Source: Refinitiv, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid at August 23, 2021 price as well.

Disclaimer

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