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 boxboard 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.

Operating Segment

Source: Company

Revenue and Geographic mix

The containerboard segment and tissue papers segment are the two most significant revenue contributors for the company, contributing 37.92% and 31.93%, respectively, for the total revenue in FY2020. Simultaneously, the United States is the enormous geography for the company, followed by Canada and Italy.

Source: Refinitiv (Thomson Reuters)

Investment Rationale

• Decreasing raw material cost: The company has benefitted from lower raw material prices over the years, which has supported the margins. However, the company witnessed a slight uptrend in the raw material cost in Q4 2020, which was offset by the strong demand, combined with recent industry price increases.

Source: Company

• Healthy financial matrix: The company continuously shows a spirited performance across the operating income and net earnings. On a sequential basis, the company registered a growth of 49% each in operating income and net income.

Source: Company

• Higher shipments and capacity utilization rate: The company reported stable growth of 3.8% in its total shipments to 3494 (000 s.t) in FY2020, against 3366 (000 s.t) in FY2019. It also improved the capacity utilization rate to 93%, despite the current slow down in the economy, which is encouraging. The company further reported a growth in its return on assets, which increased from 12.0% in FY 2019 to 13.1% in FY 2020.

Source: Company

• A consistent generator of Free cash flow: The company is consistently generating free cash flows. In Q4 2020, they clocked CAD 85 million of adjusted free cash flow, which increased by 93%, against CAD 44 million in Q3 2020. For FY2020, it reported a growth of 166% in free cash flow to CAD 285.0 million V/s CAD 107.0 million in FY2019.

Source: Company

• Declining Net debt/Adjusted OIBD:The company reported a decline in net debt to CAD 1,679 million in FY20, compared with CAD 1,963 million in the previous corresponding period, reflecting stable cash flow from operations. Furthermore, the group improved its Net debt to adjusted OIBD (Operating Income before Depreciation and Amortization) ratio to 2.5x in FY2020, against 3.25x in FY2019. 

Source: Company

• Margin improvement initiatives: In Q1 2020, the Company initiated an important profit margin improvement program for the North American operations and European operations focused on improving competitiveness, efficiency and productivity to limit the potential adverse effects of economic downturns. The program stood on five strategic pillars: net revenue management, production efficiency, optimization of sales and operations planning, supply chain efficiency and organizational effectiveness. This program's objective is to improve the adjusted OIBD margin by 1% annually in 2020, 2021 and 2022. The Company managed to exceed its target for 2020 by achieving approximately CAD 75 million of adjusted OIBD, net related costs to implement such initiatives.

Source: Company

• Huge Capex plans: The company holds robust capex plans, and the highlight would be its Bear Island containerboard project, which would account for the lion's share of its capex program. The group would also be finalizing modernization investments in its tissue converting operations, with all of these projects encompassed within its CAD 450 - 475 million capital program for 2021. The positive aspect is that the company expects these investments to be fully funded by solid projected cash flows, driven by ongoing margin improvement initiatives.

• 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 0.08 per share on March 25, 2021. 

Source: Refinitiv (Thomson Reuters)

• Risks Associated with Investment: The outbreak of COVID-19 is posing a risk to the Company's operations, and these risks include a decline in demand for its products. The prices and availability of raw materials, fluctuations in selling prices and adverse changes in the general market and industry conditions, foreign exchange and interest rates are some other critical risks involved. Any ups and downs in these factors could play a vital role in the Company's operations and financials.

Upcoming event: Recently, the company announced that it would release the first quarter of 2021 financial results before the market opens on Thursday, May 6, 2021.

Financial Overview of FY 2020

Source: Company

• In FY 2020, the company’s sales reached CAD 5,157 million, increased by CAD 161 million, or 3%, compared to CAD 4,996 million in FY 2019. This performance reflected strong sales, driven mostly by increased demand in the Tissue Papers consumer products and overall packaging solutions, mainly attributable to the repercussions of the COVID-19 pandemic and favourable exchange rates. However, the sales figures were partly offset by lower average selling prices and a mix of products for the Packaging Products segments.
• The company reported the cost of sales at CAD 4,321 million, against CAD 4,232 million in the previous corresponding period.
• The group witnessed an improvement in cost of sales as % to revenue in FY2020, which stood at 83.8% V/s 84.7% in FY2019.
• The selling and administrative expenses in the reported period increased slightly to CAD 460 million, against CAD 453 million in the previous corresponding period, simultaneously the impairment charges and restructuring cost stood at CAD 52 million V/s CAD 78 million in pcp.
• The group recorded an operating income before depreciation and amortization (OIBD) of CAD 665 million during the year, compared to CAD 550 million in 2019. The higher OBID was primarily due to improved year-over-year results in the Tissue Papers segment. The energy cost for all segments was also lower, while raw material cost was also beneficial for all segments except for the Containerboard segment.
• EBIT stood at CAD 279 million in the reported period, against CAD 119 million recorded in the previous corresponding period. Higher OBID due to the above-discussed points was the main reason for the company posting growth in its EBIT.
• The company reported a net income of CAD 198 million in FY2020, against CAD 72 million in the previous corresponding period, partially offset by higher income tax provisions at CAD 45 million V/s CAD 19 million.
• It successfully decreased its net debt to CAD 1,679 million from CAD 1,963 million at the end of 2019 and reduced net leverage to 2.5x from 3.25x at the end of 2019, which is appreciable.
• The company managed to generate strong adjusted cash flow from operating activities of CAD 582 million and adjusted free cash flow of CAD 285 million after capital investments. 

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 41.31% of the total shareholding. Lemaire and Letko, Brosseau & Associates Inc. hold the company's maximum interests at 12.18% and 9.82%, respectively. The company's institutional ownership stood at 32.51%, and ownership of the strategic entities stood at 18.19%.

Source: Refinitiv (Thomson Reuters) 

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

The company's near-term outlook is positive despite ongoing COVID-19 related uncertainty, as the demand levels in containerboard would remain strong. This, combined with recent industry price increases, are expected to offset the raw material pricing headwinds. Furthermore, the ongoing modernization, cost management, and margin improvement initiatives would partially counter the softer demand factors, if any. Also, the company is reducing the net debt and generating consistent free cash flows, which is a key positive. The company is holding huge capex plans of approximately CAD 450 - 475 million for 2021. The highlight would be its Bear Island containerboard project, which would account for the lion's share of its capex program. The positive aspect is that the company expects these investments to be fully funded by solid projected cash flows, driven by ongoing margin improvement initiatives.

Therefore, based on the above rationales and valuation, we recommend a "Buy" rating at the closing price of CAD 14.42 on April 9, 2021. We have considered Domtar Corp, Canfor Corp, Interfor Corp, West Fraser Timber Co Ltd etc., as the peer group for the comparison.

1-Year Price Chart (as on April 09, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at April 12, 2021 price as well.

---

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.