Company Profile

Imaflex Inc (TSXV: IFX) is a Canada-based packaging product company, with a primary focus on the development and manufacturing of innovative solutions for the flexible packaging and agricultural markets. The Company's flexible packaging products are largely used to protect and preserve and consist primarily of polyethylene (plastic) films and bags, and metalized films. Imaflex's polyethylene films are mainly sold to printers known as "converters", who process the film into a finished product to meet their end-customer needs. Additionally, films are sold directly to customers to protect and market their own products or bought by distributors for re-sale. According to the FY19 annual report, ~59% of the group's revenue comes from the United States, and 41% comes from the Canada market. Imaflex operates three manufacturing facilities. Two are located in the province of Quebec, including Montreal (Imaflex Inc.) and Victoriaville (Canguard and Canslit), and one is located in Thomasville, North Carolina, USA (Imaflex USA).

Investment Rationale

• Strong North America flexible packaging market fuelling growth for Imaflex: The North American flexible packaging market is valued at approximately US$29 billion. Although this market is highly fragmented and commoditized in terms of pricing, there are niches within the space that offer an opportunity for increased profitability. In 2019, Imaflex was once again ranked in the top 100 North American film and sheet manufacturers by sales.

• Significant improvement in profitability: In the first quarter of the financial year 2020, the Company saw a steep jump in profitability as compared to the corresponding period in the previous financial year, driven by a reduction in the cost of goods sold, financial costs and forex gain of CAD 1.68 million. EBITDA soared by 162.3% to CAD 4.7 million, and EBITDA margin improved to 22.5% from 8.2% reported a year-before. Net Income zoomed by 454.1% to CAD 3.09 million.

• No Material Impact of COVID-19: In the recent financial performance update, the Company reported that it had not witnessed any materially impact on the group's operations due to COVID-19 pandemic. All three plants in Canada and the USA remained fully operational and running at normal business levels. The Corporation is considered an essential vendor in both countries due to the important role its products play in protecting and preserving food and consumer products. Presently, all manufacturing facilities have the ability to take on more volume should it be required due to business interruption at another plant or heightened order flow. Furthermore, Imaflex is not experiencing any delays with its suppliers or distribution channels.

• Ample liquidity: The Company has sufficient liquidity to fund its operations. Further, despite a solid liquidity position, the Company has utilized available capital payment moratoriums on long-term debt payments to maximize cash flows throughout the crisis. As on March 31, 2020, Imaflex had approximately CAD 8.5 million of cash available for operating activities, including the unused portion under its CAD 12.0 million revolving line of credit. Cash inflows from operations in the first quarter of FY20 improved to CAD 3.1 million against CAD 2.2 million reported a year-ago period.
  
  
• Bullish trend in stock price: At the last traded price of CAD 0.63 (on August 4, 2020), shares of IFX were traded above the long-term support level of 200-day SMA, which generally act as a long-term support level for an underlying security. The Price/200-day SMA ratio stood at 1.06x implies that shares are trading approximately 6% above its 200-day SMA.

• Risks associated to the investment: The Company operates in a competitive industry and marketplace in which there are a number of participants, which would lead to pricing competition and in lieu it would have a weigh on the group's revenue. Further, the Company is exposed to volatility in the US dollar against the Canadian dollar, as a weaker dollar against the Canadian dollar would drag group's profitability as the majority of the group's revenue comes from the US market. Further, the continued outbreak of COVID-19 might disrupt the group's supply chain.

1QFY20 Financial Highlights

Source: Company filings

In the first quarter of the financial year 2020, IFX reported revenue was 3.8% lower at CAD 21.03 million compared to CAD 21.87 million in the previous corresponding period. The decline was driven by the impact on product pricing resulting from competitive pressures and lower resin prices. The group recorded a 4% annual growth in packaging film volume during the quarter. The group’s gross profit improved to CAD 4.0 million from CAD 3.1 million reported a year-before period, and gross margin improved to 19.2% from 14.0% reported a year-before. The improvement was driven by the higher sales volumes, favourable fluctuations in foreign exchange and control on the variable costs.

During the quarter, the group recorded an increase in selling and administrative expenses, which stood at CAD 1.9 million as compared to CAD 1.7 million in the previous corresponding period. The increase was driven by higher sales commissions resulting from the better sales volumes on a poundage basis and other miscellaneous expenses.

Earnings before Interest, tax and depreciation surged by 162.3% to CAD 4.73 million from CAD 1.8 million reported a year-ago period. EBITDA margin leapt up to 22.5% of the sales from a mere 8.2% reported in the corresponding previous financial year.

Further, despite a marginal reduction in the sales, the group’s net income after tax jumped by 454.1% to CAD 3.09 million from CAD 0.6 million in the previous corresponding period. This was primarily driven by lower cost of goods sold, reduction in the finance costs and substantial forex gain of CAD 1.68 million. Further, basic earnings per share jumped by 500% to 0.06 cents.

Cash generated from operations, before changes in the working capital and taxes paid, stood at CAD 3.1 million for the first quarter of 2020, up from CAD 2.2 million in Q1 2019. However, post changes in the working capital and taxes paid, net cash generated by operating activities was CAD 2.0 million for the current quarter, versus CAD 3.1 million in 2019. The resulting year-over-year decrease was driven by higher receivables, stemming from better sales volumes in the current quarter and an increase in income taxes paid. As on March 31, 2020, Imaflex had approximately CAD 8.5 million of cash available for operating activities, including the unused portion under its CAD 12.0 million revolving line of credit.

Further, in the quarter under review, group’s had cash outflows from financing activities of CAD 1.9 million, down from CAD 2.7 million of outflows in the corresponding prior-year period. The CAD 0.8 million year-over-year reduction in outflows was largely due to changes in bank indebtedness, partially offset by an increase in long-term debt payments versus the first quarter of 2019. At the end of Q1FY20, the group’s Bank indebtedness reduced to CAD 3.57 million as compared to CAD 4.54 million reported a year-ago period and long-term debt position also reduced to CAD 5.95 million as compared to CAD 6.44 million reported a year-over period.

Stock Performance

At the closing (as on August 04, 2020), shares of IFX traded 1.56% lower at CAD 0.63. In a year-over period, shares of IFX tested a 52W High of CAD 0.76 on June 08, 2020 and a 52W Low of CAD 0.36 on March 24, 2020.  At the last traded price of CAD 0.63, shares of IFX traded approximately 17% lower against its 52W High price level and 77.46 above its 52W Low price level, which implies that the stock is more tilted towards its 52w high price level, a positive price trend.

1-Year Price Performance (as on August 04^th, 2020, after the market close). Source: Refinitiv, Thomson Reuters

Shares of IFX delivering a 23.5% return over the past three months and traded 1.61% higher in the last five trading sessions. However, traded 3.8% lower on a YTD basis.

Strategic Investors holds approximately 47.7% stake in the company; however, no institutional investors have a stake in the company.

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: IFX reported a decent quarterly performance against the corresponding previous financial period, with significant improvement in profitability, led by a reduction in the cost of goods sold, financial costs and forex gain of CAD 1.68 million. EBITDA soared by 162.3% to CAD 4.7 million, and EBITDA margin improved to 22.5% from 8.2% reported a year-before. Also, the company had no material impact on its operation because of COVID-19 pandemic.

The demand for packaging products is likely to increase as the governments across the states are allowing the industrial and manufacturing activities, which is a key positive for the group. In the long run, the company’s next-generation agriculture film, ADVASEAL also offering an exciting opportunity for growth and the company has achieved some notable successes in recent months with its Efficacy Trial. The company is highly confident of ADVASEAL’s potential for growers, the environment and shareholders.

Further, despite a decent financial performance, shares of IFX are trading at a substantially discounted valuation. From the valuation standpoint in terms of NTM Price to Earnings ratio, shares of the IFX trading at a forward PE ratio of 8.25x, whereas industry median PE ratio stood at 13.48x, which reflects a valuation gap of 38.8% against the industry median and from the NTM EV/Sales multiple standpoint, shares of IFX trading at a multiple of 0.56x, whereas industry median EV/Sales multiple stood at 1.35x, which implies a valuation gap of 58.5%. Therefore, given the decent financial performance of the company and resilient demand for the company’s offering, we have given a “Speculative Buy” recommendation at the closing price of CAD 0.63 (as on August 04th, 2020), a lower double-digit upside potential.

Disclaimer

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