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. The business activity of the company functions in Canada, the United States, Italy, and other countries.

• Reported higher sales: In the first quarter of 2022, the firm recorded greater revenues of CAD 1,038 million, up CAD 96 million or 10% over the same period previous year. This is primarily due to stronger revenues in all categories due to improved selling prices and sales mix, as well as higher volumes in the Tissue Papers and Specialty Products segments.

Source: Company Filing

• Sequential improvement in shipments and capacity utilization: The company increased its total shipments of packaging products in Q1 2022 to 372 (in '000 s.t.) from 368 (in '000 s.t.) in Q4 2021. In addition, its consolidated manufacturing capacity utilization rate increased to 90% in the same reporting period, up from 88% in Q4 2021. An improvement in shipments and utilization rate is a significant benefit for the firm since it demonstrates the company's bright prospects and increased product demand.
• Adding innovative technology: The company is expanding its portfolio of northbox® isothermal packaging solutions by incorporating cutting-edge technology: northbox® XTENDTM. This is a new addition to the extensive and configurable northbox® portfolio, tailored to provide clients with operational improvements.

• Inaugurates a new production site: The company is also commissioning a new production site for its northbox® product line: Cascades Enviropac – York. This is Cascades' second plant to open in four months to support its expansion in the isothermal packaging solutions industry. Cascades is increasing its footprint in the East, getting closer to its clients and enhancing its position as a strategic partner throughout North America, after constructing its first location in the West, in Tacoma.

• Positive near-term outlook: In the first quarter of 2022, demand for packaging segments remained constant and positive. In the near future, the business will execute price increases in its packaging sectors to assist overcome input cost challenges. These, together with increased demand for packaging items as the summer season approaches, will gradually enhance profitability levels in the coming months.

• Regular Dividend Distribution: The Company has an excellent track record of dividend distribution and has increased its distribution over the years, reflecting resilience and healthy cash flow generation. Recently it paid a quarterly dividend of CAD 0.12 per share on June 9, 2022. On top of this at the last traded price of CAD 9.95 the stock of CAS generated healthy dividend yield of 4.82, which looks impressive, considering the current interest rates.

Source: REFINITIV, Analysis by Kalkine Group

Risks Associated to Investment

The Company's operations are vulnerable to a number of risks, the most serious of which being a drop in demand for its products. Other risks that might have a significant impact on the Company's operations and finances include raw material pricing and availability, variations in selling prices and adverse changes in general market and industry conditions, foreign exchange and interest rates. 

Financial Overview of Q1 2022

• Uprise in sales: In Q1 2022, the company’s consolidated sales increased to CAD 1,038 million, compared to CAD 942 million in Q1 2021. An increase in sales was primarily due to higher sales in all segments as a result of improved selling prices and sales mix and increased volumes in the Tissue Papers and Specialty Products segments.
• Elevated cost of sales: The company witnessed an increase in its cost of sales, which stood at CAD 1,042 million in Q1 2022, against CAD 898 million in pcp, primarily due to an increase in raw material costs in all segments.
• Clocked operating loss: Primarily due to higher cost of sales in the reported period of Q1 2022, the company witnessed operating loss of CAD 4 million compared to operating income of CAD 44 million in pcp.
• Net losses: In Q1 2022, the company reported net loss of CAD 15 million, against net earnings of CAD 22 million in pcp.
  

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 46.26% of the total shareholding. Lemaire (Laurent) and Letko, Brosseau & Associates Inc. hold the company's maximum interests at 12.36% and 9.99%, respectively. The company's institutional ownership stood at 33.90%, and ownership of the strategic entities stood at 22.65%.

Valuation Methodology (Illustrative): EV to Sales based 

Stock recommendation

The company reported partly lower numbers in Q1 2022, but demand levels for its packaging segments remained consistent and continued to demonstrate solid underlying trend. Furthermore, it saw an increase in total packaging product shipments as well as an increased consolidated production capacity utilization rate of 90% in the same reporting period, which is a significant positive.

In the near future, the business will execute price increases in its packaging sectors to assist overcome input cost challenges. These, together with increased demand for packaging items as the summer season approaches, will gradually enhance profitability levels in the coming months. Furthermore, the firm is introducing new technologies and has opened a new production facility, which will help it achieve larger margins and significant cash flows in the future.

Hence, considering the aforesaid rationales and valuation, we recommend a “Speculative Buy” rating in the stock at the last closing price of CAD 9.95 on June 17, 2022. Moreover, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on June 17, 2022). Source: REFINITIV, Analysis by Kalkine Group 

*Recommendation is valid on June 20, 2022, price as well. 

Technical Analysis Summary

Disclaimer

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