Cascades Inc.

Cascades Inc. (TSX: CAS) is engaged in the production, conversion and marketing of packaging and tissue products composed mainly 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:

• Growth from the Containerboard Segment: The company is the sixth largest containerboard producer in North America and derives its majority revenue from this segment (~52% in Q3FY21). During Q3FY21, CAS witnessed strong demand from the containerboard segment which subsequently resulted to higher realization prices and supported the topline. Notably, revenue for 9MFY21 from the containerboard segment stood at CAD 1,507 million, which is 6% higher than pcp. Due to improved demand dynamics, total capacity of the containerboard in North America is likely to increase to 51.3 million short tons (M s.t.) in 2026, from its current capacity of ~44.9 M s.t. in 2021, reflecting a growth of 2.7% CAGR basis. The company is well poised to take advantage of the above demand growth arising from the industry.

Source: Company Report

• Improved Demand from the Comprehensive Packaging Solutions: In the recent past, the packaging industry is witnessing a surge in demand from the Comprehensive Packaging Solutions, which has resulted to improved performance within the specialty segment supported by favorable sales mix. The group has expanded its operations due to increased demand within the specialty segment and reported improved margins and profitability, which is encouraging. Notably, in 9MFY21, the company posted its sales of CAD 397 million, grew 13% on y-o-y basis. Operating income from the above segment grew sharply by 40% y-o-y basis to CAD 42 million in 9MFY21, supported by higher overall volumes and improved price realization coupled with lower SG&A and direct labour costs within the segment.

• Growth in eCommerce to support future sales volumes: In the recent past, we have seen a tremendous growth in eCommerce platform, due to the changing buying pattern of the consumers. Notably, the industry is witnessing an upsurge in the online orders primarily due to an increase order for the Food & Beverage items, medicines, industrial products etc. The above has subsequently resulted to higher demand for corrugated boxes, consumer products packaging items, industrial packaging products etc. and supported the company’s overall sales volume. Continuation of the above trend is likely to support the group’s upcoming performances.

• Prudent working capital management: The company has a prudent working capital management, which indicates the group is well managing its short-term liabilities with its current assets. Notably, quick ratio was recorded at 1.23x in Q3FY21, higher than the industry median of 1.00x. Moreover, the company’s cash cycle days stood lower at 34.8 days, versus the industry median of 43.3 days. The above indicates that the group is efficient to convert its investments in inventory and other resources into cash flows. 

• Attractive dividend yield: Historically, 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 ~3.416% on an annualized basis, which looks attractive considering the persisting interest rate scenario. Moreover, in 9MFY21, the company reported a dividend payment of CAD 29 million, higher than CAD 22 million in pcp.

Five years dividend distribution (Source: Refinitiv)

• Decline in total debt: At the end of Q3FY21, the company reported its total debt of CAD 1,911 million, as compared to CAD 2,063 million in Q4FY20. The above is impressive, and results to lower finance costs, which is a key positive.

Risk associated with the investment:

Surge in raw material prices due to inflationary pressures might take a toll on the company’s operating margins. During 9MFY21, the company saw a 17% y-o-y dip in total shipment from the tissue paper, due lower demand for the Consumer Products, coupled with lower average realize price. Continuation of the above trend might impact the company’s cash flows.

Q3FY21 Financial Highlights:

• Marginally higher in topline: CAS declared its quarterly result, wherein the company posted its sales of CAD 1,030 million, as compared to CAD 1,014 million in pcp. The growth was primarily attributable to higher income from the Packaging Products segment (CAD 996 million v/s CAD 880 million in pcp), partially offset by sluggish performance from the tissue-paper segment (CAD 344 million v/s CAD 364 million in pcp)

• Increase in operating income: The quarter witnessed a surge in the input costs, and reported higher cost of sales, and increase in selling and administrative expenses, however, a gain form Gain on acquisitions, disposals and others supported the profitability. Operating income stood at CAD 73 million, as compared to CAD 54 million in pcp.

• Lower net earnings: Net income stood at CAD 46 million, as compared to CAD 58 million in pcp, due to a provision for income tax amounting CAD 30 million, versus a tax recovery of CAD 7 million in pcp. However, a slightly lower finance expense of CAD 22 million versus CAD 24 million in pcp partially supported the bottom-line.

Q3FY21 Income Statement Highlight (Source: Company Report) 

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 43.52% stake, Lemaire (Laurent) and Letko, Brosseau & Associates Inc. are the major shareholders in the company with an outstanding position of 12.35% and 9.98%, respectively.

Source: REFINITIV, Analysis by Kalkine Group.

Valuation Methodology (Illustrative): EV to Sales

   Analysis by Kalkine Group

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:

For the fourth quarter of FY21, the group is likely to report improved volumes from the Containerboard and specialty packaging segments supported by surging demand and roll-out of price increases. This is expected to support top line of the company. We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a double-digit upside (in percentage terms).  For the said purposes, we have considered peers like West Fraser Timber Co Ltd, Clearwater Paper Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of CAS at the last traded price of CAD 14.05 on January 07, 2022. 

Technical Analysis Summary

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

One-Year Technical Price Chart (as on January 07, 2022). Source: Kalkine, Analysis by Kalkine Group 

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

*Recommendation is valid on January 10, 2022 price as well.

Disclaimer

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