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.

Key Updates:

• Bullish outlook of the Containerboard sector: The company derives its majority revenue from the Containerboard segment, and the outlook of the above segment is likely to remain positive across the North America Region in the coming years. In FY21 to FY26E, the capacity of the containerboard industry is expected to increase by ~2.7% on a CAGR basis to 51.3 million short tons (M.S.t), supported by improved demand dynamics. Notably, despite the supply chain constraints due to rail disruptions caused by flooding in Western Canada, the above segment generated a revenue of CAD 2,009 million, which is higher than CAD 1,918 million in FY20. We believe the company is highly poised to take advantage of the opportunity arising from the sector.

Source: Company Presentation

• Strong momentum from the Specialty Products segment: The company’ Specialty products segment performed well in the recent past, supported by product innovation and strategic commercial decisions. Notably, in FY21, the specialty products segment reported revenue and operating income before depreciation and amortization (OIBD) of CAD 548 million and CAD 74 million, respectively, significantly higher than CAD 473 million and CAD 58 million, respectively, in FY20. As per the management, for Q1FY22, the company expects improved sales volume and higher selling price within the specialty product segment, which is likely to support the overall company’s performance.

• Growth from eCommerce to support packaging demand: In the recent past, we have seen havoc growth in an eCommerce platform due to the changing buying pattern of the consumers. Notably, the industry is witnessing an upsurge in online orders primarily due to an increasing order for Food & Beverage items, medicines, industrial products etc. This has resulted in 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.

• Stable Dividend Payment: Historically, the company reported a consistent dividend payment backed by stable cash flows, which is impressive. The stock of CAS has an annualized dividend yield of ~3.707%, which looks lucrative considering the ongoing interest rate scenario. Moreover, in FY21, the company reported a dividend payment of CAD 55 million, higher than CAD 45 million in FY20.

• Slightly lower cash cycle days: The company reported its cash conversion period of 43.5 days in FY21, which is lower than the industry median of 47.2 days and even stood below FY20 of 46.3 days. A declining cash conversion period indicates that the company takes a lower time to convert its investments to cash flows.

• Prudent capital management: The company reported a significant reduction in the total debt, which indicates prudent capital management.Total debt stood at CAD 1,525 million in Q4FY21, which is the lowest in the last five quarters. A descending total debt indicates improved financial flexibility. Moreover, Net debt to adjusted Operating income before depreciation and amortization (OIBD) stood healthy 3.5x, which is close to the lowest bracket since 2012. A lower ratio suggests a higher ability to fund its existing borrowings.         

Source: Company Presentation

Risks associated with the investment: The company might face challenges like an increase in labour costs higher raw material prices, which would dampen the company’s profitability margins.

 FY21 Income Statement Highlights:

FY21 Income Statement Highlights (Source: Company Report) 

• Decline in income: CAS declared its full-year result, wherein the company posted its sales of CAD 3,956 million, as compared to CAD 4,105 million in FY20. The decline was primarily attributable to a poor performance from tissue-paper segment (CAD 1,272 million in FY21 v/s CAD 1,615 million in FY20), partially offset by improved income from both containerboard and specialty-products segments.
• Lower Operating income: The quarter witnessed a slight surge in the input costs, and reported higher cost of sales coupled with an increase in selling & administrative expenses. Meanwhile, impairment charges and restricting costs stood significantly higher at CAD 110 million, as compared to CAD 43 million in FY20. Operating income stood at CAD 50 million, slide from CAD 292 million in FY20. This was primarily due to a lower income combined with higher expenses.

• Slide in bottom-line: Net earnings stood at CAD 162 million, declined from CAD 198 million in FY20, due to lower operating income and higher loss on repurchase of long-term debt. This was partially offset by higher income from discontinued operations (CAD 234 million v/s CAD 51 million in FY20) and lower finance costs.

Top-10 Shareholders

Top ten shareholders of the company together hold approximately 43.39% 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

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

Despite the recent headwinds like supply chain disruption, lower sales volumes from the tissue paper segment etc., the company’s reported decent topline performance in Q4FY21 and FY21, respectively. Notably, the company has successfully reduced its total borrowings in the recent quarter, which is an indication of prudent capital management. Moreover, the company’s prime segment i.e. Containerboard, is likely to remain solid in the coming quarters, driven by improved demand dynamics, which is a key positive as it indicates stability in income. 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 Acadian Timber Corp, West Fraser Timber Co Ltd etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of CAS at the closing price of CAD 12.95 on March 11, 2022.

One-Year Technical Price Chart (as on March 11, 2022). Analysis by Kalkine Group

*Recommendation is valid on March 14, 2022, price as well. 

Technical Analysis Summary:

Disclaimer

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