CCL Industries Inc. (TSX: CCL.B) manufactures and sells packaging and packaging-related products like pressure sensitive and extruded film materials, used for labels on consumer packaging, healthcare, automotive, and consumer durable products. 

Key Investment Highlights:

• Expansion Strategy: The company derives its majority income from the North America and Western Europe, which are reasonably mature markets, while the group is focusing on adding several value-added products across these geographies. This is expected to boost the overall margins in the coming days. Apart from this, the company is targeting developing geographies like Asia and Latin America and other emerging markets wherein, a higher level of economic growth is still expected over the coming years. This would provide ample opportunities for the group to improve its market share and would increase sales volumes from these regions.

• Strong results from Checkpoint operation: The company reported solid traction from its checkpoint segment and reported sales of CAD 772.5 million in FY21, jumped from CAD 635.5 million in FY20. Checkpoint manufactures technology-driven loss-prevention, inventory-management and labelling solutions, which includes radio frequency and radio frequency identification (RFID) solutions, targeted primarily to the retail and apparel industry. Notably, operating profit soared to CAD 115.5 million in FY21, as compared to CAD 80.3million in FY20.

• Solid Prospects from New Acquisition: Recently, the company reported its acquisition of Adelbras Brazil, which has its operations at Manaus in the Amazon tax free zone. Adelbras is a Brazil-based company and is a leading producer of adhesive tapes, while derives its revenue from masking, bonding & packaging applications. The organization is a debt free entity and reported its sales of CAD 105.2 million with adjusted EBITDA estimated at CAD 18.7 million. This is likely to add meaningful contribution to the company’s overall performance and would expand its presence within Brazil.

• Promising Performance from Avery: The group reported a higher operating income of CAD 148.8 million in FY21, surged from CAD 113.3 million in FY20, reflecting an operating profit margin of 21% in FY21, which is higher than 17.9% in FY20. Avery is a leading supplier of labels, specialty converted media and software solutions for short-run digital printing applications for businesses and consumers. This operating segment showed a stupendous revival in FY21 and posted better performance than 2019 (pre-pandemic levels). Moreover, a higher operating margin shows better revenue-mix, which is a key positive.

 

Source: Company Report, Analysis by Kalkine Group

• Higher Cash flow with no near-term Debt Maturity: The company reported a higher free cash flow from operations of CAD 616.3 million in FY21, which is higher than CAD 531.8 million in FY20. A higher cash flows shows better liquidity position and is a key positive. Moreover, the company do not have any major debt repayment before 2026, which indicates preservation of funds, and is likely to support the company’s liquidity position.

Source: Company Presentation

• Industry beating profitability margins: The company reported strong profitability margins, wherein EBITDA and operating margins were recorded at 20.5% and 14.6%, respectively, in FY21, higher than the industry median of 15.7% and 9.6%, respectively. Net margin stood at 10.5% in FY21, higher than the industry median of 5.1%.

Risk Associated with the investment:

Almost 98% of the end users are denominated in foreign currencies, and hence a volatility in the foreign exchange rates would dampen the company’s sales and profitability. Moreover, the company might face steep competition from other manufacturers which might lead to loss of market share.

FY21 Financial Highlights:

 FY21 Income Statement Highlights (Source: Company Report)

• Elevated Revenue:B announces its full-year result, wherein the company posted its sales of CAD 5,732.8 million, stood higher than CAD 5,242.3 million in FY20. The growth was driven by better market demand within the cosmetic skin care and products, along with improved demand from closure labels at fast food chains and other consumer packages.
• Higher Gross Profit: The group reported a higher gross profit of CAD 1,592.1 million, stood higher than CAD 1,502.2 million in FY20, thanks to the elevated revenue, partially offset by a significant rise in cost of sales.
• Rise in input costs: The company reported a rise in selling, general & administrative expenses, while a lower finance cost remained as a drag. Earnings before income tax stood at CAD 780.6 million, grew from CAD 693.5 million in FY20.
• Growth in bottom-line: The group reported net earnings of CAD 599.1 million, as compared to CAD 529.7 million in FY20, thanks to elevated earnings before income tax, partially offset by higher income tax expense.

Top-10 Shareholders: 

Top ten shareholders of the company together hold approximately 37.60% stake, 1281228 Ontario, Inc. and Mackenzie Financial Corporation are the major shareholders in the company with an outstanding position of 9.96% and 6.67%, respectively.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales based

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:

For FY21, the company reported a higher dividend payment of CAD 151 million, which is comparatively higher than CAD 128.7 million in FY20. This is impressive as most of the companies are lowering their dividend distribution in order to retain liquidity.

The new acquisitions have positioned the company’s CCL Segment as the global leader for labels in the personal care, healthcare, food and beverage, durables, security and specialty categories. Moreover, the management continues for and capital investments to upgrade and expand its information technology systems and security, which is critical to keeping pace with customer requirements and in gaining or maintaining a competitive edge.

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 Winpak Ltd, Intertape Polymer Group Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of CCL.B at the last closing market price of CAD 56.18 on April 22, 2022. 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 April 22, 2022). Source: REFINITIV, Analysis by Kalkine Group

*Recommendation is valid on April 25, 2022, price as well. 

Technical Analysis Summary

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Disclaimer

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