Cascades Inc. (TSX: CAS) is engaged in the production, conversion and marketing of packaging and tissue products mainly composed of recycled fibres. The company is organized into four main business segments, namely, Containerboard, Boxboard Europe, Specialty Products (which constitutes packaging products), and Tissue Papers.

Investment Rationale:

• Improved working capital management: At the end of Q2FY21, the company showcased a prudent working capital management, which indicates ample short-term liquidity, which is a key positive. Quick ratio and current ratio stood at 1.29x and 1.71x, respectively, higher than the industry median of 0.99x and 1.57x, respectively. Moreover, the company’s cash cycle days stood at 35.2 days, which is lower than the industry median of 46.1 days.

• Impressive dividend yield: Over the years, the company reported a consistent dividend payment backed by stable cash flows, which is impressive. The stock of CAS is carrying a dividend yield of ~3.347% on an annualized basis, which looks attractive considering the ongoing interest rate scenario.

Five-year dividend distribution, Analysis by Kalkine Group

• Positive outlook of the Containerboard industry: The company derives its majority revenue from the Containerboard segment, and the outlook of the above segment is likely to stay positive in the North America Region. During FY21 to FY25, the capacity of the above segment is expected to increase by ~2.9% on CAGR basis to 50.2 million short tons (M.S.t), supported by improved demand dynamics. We believe, the company is highly poised to take advantage of this opportunity.

                        

Source: Company Report 

• Growing traction from Packaging Solutions: The packaging industry is witnessing surge in demand from the Comprehensive Packaging Solutions, which has resulted improved performance within the specialty segment supported by favorable sales mix. Additionally, to cater the growing demand, the group has expanded its operations within the specialty segment and reported improved margins and profitability, which is commendable. Notably, in H1FY21, the company posted sales of CAD 253 million, grew 9% on y-o-y basis. Operating income before depreciation and amortization from the above segment also grew 33% y-o-y basis to CAD 36 million in H1FY21.

• Near term demand outlook remains positive: For the rest of FY21, the management expects strong demand within the Containerboard segment. Also, specialty Products volume are expected to grow at a decent pace. Meanwhile, sales volume for Q3FY21 within the Tissue segment is expected to improve on Q-o-Q basis.

• Decline in total debt: The company reported a constant reduction in the total debt, which indicates a prudent capital management. Total debt stood at CAD 1,878 million in Q2FY21, which is lowest in the last five quarters. A descending total debt indicates improved financial flexibility.

Source: Company Reports, Analysis by Kalkine Group 

• RSI is at an oversold zone: On the daily chart, the RSI of the stock has entered into an oversold zone, which suggests a possible upward move from the current trading level. Additionally, the stock price is hovering towards the lower band of the Bollinger band, which again indicates possibility of price appreciation in the coming days.

Technical Price Chart (as on October 29, 2021). Source: REFINITIV, Analysis by Kalkine Group

Q2FY21 Financial Highlights:

• Slide in topline: CAS declared its quarterly result, wherein the company posted its sales of CAD 956 million, as compared to CAD 1,020 million in pcp. The decline was primarily due to lower volumes within the Tissue segment coupled with a slide in the demand scenario due to fluctuations in consumer buying patterns.

• Decline in costs of sales & expenses: In Q2FY21, the group reported a lower cost of sales, slightly higher selling & administrative expense, and a lower impairment charges & restructuring cost. Notably, total cost of sales & expenses stood lower at CAD 933 million in Q2FY21, as compared to CAD 956 million in pcp.

• Lower net earnings: The quarter was marked by lower financing expenses coupled with a decrease in the provision for income taxes. Net earnings from continuing operations stood at CAD 8 million, as compared to CAD 42 million in pcp.            

             

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The performance of the Tissue Papers segment has remained sluggish in the recent past, while revenue from the segment stood at CAD 589 million in H1FY21, lower than CAD 870 million in pcp. Continuation of the above trend would dampen the company’s overall performance. Moreover, the company witnessed a surge in raw material prices due to inflationary pressures across all its business segments, and continuation of the above trend might take a toll on the company’s operating margins in the coming quarters.

Top-10 Shareholders

Top ten shareholders of the company together hold approximately 43.04% stake, Lemaire (Laurent) and Letko, Brosseau & Associates Inc. are the major shareholders in the company with an outstanding position of 12.15% and 9.82%, respectively.

Source: REFINITIV, Analysis by Kalkine Group 

Valuation Methodology (Illustrative): EV to Sales

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:

During the first half of FY21, the company reported revenue of CAD 1,000 million, from the Containerboard segment, higher than CAD 912 million in pcp, supported by a 6% y-o-y increase in shipment and a 4% growth in the Average Selling Price. We expect the above trend to continue in the coming quarters, which would positively contribute to the company’s overall performance. The company is focusing on improving its net selling price, volumes, and customer & product mix. Additionally, the group is also focusing on improving its operational structure and lower its SG&A costs in order to improve its margins and cash flows. We have valued the stock using the EV to Sales-based valuation methodology and have arrived at a double-digit upside (in percentage terms).  For the said purposes, we have considered peers like Interfor Corp, Canfor Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of CAS at the last closing price of CAD 14.34 on October 29, 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:

One-Year Technical Price Chart (as on October 29, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on November 01, 2021 price as well.

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Disclaimer

 

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