Supremex Inc (TSX: SXP) is a leading North American manufacturer and marketer of envelopes and growing provider of folding cartons, corrugated boxes, labels and eCommerce packaging solutions. Supremex operates facilities across seven provinces and three facilities in the United States and employs approximately 845 people. Supremex’s growing footprint allows it to efficiently manufacture and distribute paper and packaging solutions designed to the specifications of major national and multinational corporations, resellers, government entities, SMEs and solutions providers.

Revenue Mix

Investment Rationale

• Improved Performance across Geographies it Operates: Revenue from the Canadian envelope market was CAD 21.7 million, up 6.9% or CAD 1.4 million from CAD 20.3 million in the third quarter of 2019. The growth was led by a volume increase of 13.4% primarily from the acquisition of Royal Envelope, which more than compensated for the effect of the secular decline on the Company’s legacy envelope sales due to the effect of the COVID-19 pandemic on non-essential envelope demand. Revenue from the U.S. envelope market was CAD 12.4 million, an increase of 6.8% or CAD 0.8 million from CAD 11.6 million in the third quarter of 2019. The growth was on account of a higher volume of units sold (up by 15.0%) from market share gains and to a lesser extent demand related to the vote-by-mail initiative ahead of the 2020 U.S. elections.

• Solid Third Quarter Performance: In the third quarter of FY20, total revenue was CAD 49.9 million, representing an increase of 10.4% from the equivalent quarter of 2019. The growth was driven by a 6.9% increase in envelope segment revenue on a YoY basis and 18.9% surge in packaging and specialty products segment revenue on a YoY basis. Envelope segment Adjusted EBITDA was CAD 5.8 million, up CAD 0.6 million from CAD 5.2 million in the third quarter of 2019. Packaging and specialty products segment Adjusted EBITDA was CAD 2.9 million, up CAD 2.3 million from CAD 0.6 million in the third quarter of 2019 primarily from higher e-commerce sales and efficiency gains in the folding carton division. The envelop segment’s Adjusted EBITDA margin was 16.9%, 60 bps up from 16.3% in the equivalent period of 2019. The specialty operations segment’s adjusted EBITDA margin was 18.5% compared to 4.5% in the equivalent period of 2019.

• Insiders Remain Net Buyer Throughout 2020: Throughout 2020, the insiders remain net buyer and utilizes COVID-19 lead free fall in the stock as an opportunity to accumulate shares at a discounted price and valuation. Over the past one year, insiders increased their stake for more than ten times and bought shares in March, August, September, November and December 2020. This implies that management is quite bullish on the future performance and recent buying transactions indicate that despite an approximately 50% recovery from 52Week’s low, insiders are still quite bullish on the business prospect. Also, this brings a lot of confidence among the retail investor’s community.

               

Insider’s Activity. Source: Refinitiv (Thomson Reuters)

• Stock is Hovering in a Bullish Price Zone: Shares of SXP hovering in a bullish zone with its shares traded above the long-term crucial support of 200-day, 100-day and 50-day SMAs. Also, at the last traded price of CAD 1.98, its shares traded approximately 35% above the long-term crucial support level of 200-day SMA, implies a strong bullish price trend in the stock.    

     

Technical Price Chart. Source: Refinitiv (Thomson Reuters)

Risks Associated to Investment:

• Seasonality risk: Supremex’ revenue is subject to the seasonal advertising and mailing patterns of its customers.
• Credit risk: The accounts receivable and credit risk stems primarily from the potential inability of clients to discharge their obligations.
• Forex risk: About 32% of the group’s total revenue comes from the US market, which implies that the company is exposed to currency translation risk, primarily USD/CAD.

Financial Highlights: Q3FY20

Source: Company Filing

• Total revenue for the three months ended September 30, 2020, was CAD 49.9 million, representing an increase of 10.4% from the equivalent quarter of 2019.
• Revenue from the envelope segment increased by 6.9% to CAD 34.1 million compared to CAD 31.9 million in the equivalent quarter of 2019, driven by 6.9% increase in revenue from the Canadian envelope market and 6.8% increase in revenue from the US envelope market.
• Revenue from the packaging and specialty products segment was CAD 15.8 million, an increase of 18.9% or CAD 2.5 million compared to the equivalent quarter of 2019. The revenue growth came from the Company’s e-commerce packaging business, which onboarded new customer accounts in 2020. Packaging and specialty products represented 31.6% of the Company’s revenue in the quarter, up from 29.3% during the equivalent period of last year.
• In the Canadian market, volume increased by 13.4% primarily from the acquisition of Royal Envelope, which more than compensated for the effect of the secular decline on the Company’s legacy envelope sales and the effect of the COVID-19 pandemic on non-essential envelope demand. Average selling prices were lower by 5.7% from last year’s comparable period primarily as a result of changes in the envelope mix sold during the COVID-19 pandemic.
• In the US market, the volume of units sold increased by 15.0% from market share gains and to a lesser extent demand related to the vote-by-mail initiative ahead of the 2020 US elections. Average selling prices decreased by 7.1% primarily as a result of changes in the product mix sold during the COVID-19 pandemic.
• Operating expenses for the three-month period ended September 30, 2020, were CAD 35.1 million compared with CAD 34.4 million in the equivalent period of 2019, an increase of CAD 0.7 million or 2.1%. The increase was mainly attributable to the unit volume growth from the Royal Envelope acquisition and was mitigated by synergies and tight control over operating expenses to manage the effects of the COVID-19 pandemic, operational improvements at the Folding Carton division and CAD 0.6 million from the CEWS program.
• On a percentage of revenue basis, operating expenses decreased from 76.1% to 70.4% versus the equivalent period of 2019. Excluding the CEWS, operating expenses were 71.6%.
• EBITDA and Adjusted EBITDA was CAD 8.1 million, compared with CAD 5.4 million in the equivalent period of last year, representing an increase of 49.3% primarily from the contribution from the Royal Envelope acquisition, higher e-commerce sales, growth in the US envelope businesses and CAD 0.9 million from the CEWS program. Adjusted EBITDA margins increased to 16.2% compared to 12.0% in the equivalent quarter of 2019. Excluding the contribution of the CEWS, Adjusted EBITDA margins were at 14.3%.
• Envelope segment Adjusted EBITDA was CAD 5.8 million, up CAD 0.6 million from CAD 5.2 million in the third quarter of 2019.
• Packaging and specialty products segment Adjusted EBITDA was CAD 2.9 million, up CAD 2.3 million from CAD 0.6 million in the third quarter of 2019 primarily from higher e-commerce sales and efficiency gains in the folding carton division.
• Net Earnings were CAD 2.7 million (or CAD 0.10 per share) for the three-month period ended September 30, 2020, compared with CAD 1.2 million (or CAD 0.04 per share) for the equivalent period in 2019.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 37.12% of the total shareholding. Jerry Zucker Revocable Trust is the entity holding maximum shares in the Company at 21.47%, and Claret Asset Management Corporation is the second-largest shareholder, with a holding of 9.99%. Institutional Ownership in the Company stood at 14.41%, and strategic ownership stood at 22.71%.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

*Note: All forecasted figures and peers have been taken from Thomson Reuters.

Peer Comparison

Source: Refinitiv (Thomson Reuters) 

Stock Recommendation: Supremex is a leading North American manufacturer and marketer of envelopes and a growing provider of paper-based packaging solutions. The company manufactures a broad range of stock and custom envelopes in an array of styles, shapes and colours, which allows it to offer a high degree of flexibility and customization. For over 40 years, Supremex has developed its core paper substrate and converting expertise to become one of the largest manufacturers and distributors of envelopes in North America. In 2014, the company implemented a growth and diversification strategy aimed at expanding its paper-based packaging offering into a folding carton and corrugate to serve several value-added markets in Eastern Canada. The company’s packaging and specialty products revenue now account for 31.6% of its revenue in the third quarter of 2020.

Further, the company reported stellar growth in the third quarter of FY20, with total revenue up by 10.4% on a YoY basis, driven by growth witnessed in both the operating business segments and geographical segments. More importantly, the company’s packaging and specialty products segment revenue surged by ~19% on a YoY basis as the growth came from the company’s e-commerce packaging business which onboarded new customer accounts in 2020.

Also, its shares are hovering in a long-term bullish zone as at last close, its shares traded well above the long-term as well as short-term crucial support levels of 200-day and 50-day SMAs.

Therefore, based on the above rationale and valuation, we have given a “Speculative Buy” recommendation at the closing price of CAD 1.98 on January 19, 2021.

1-Year Price Chart (as on January 19^th, 2021). Source: Refinitiv (Thomson Reuters)

 

*Recommendation is valid at January 20, 2021 price as well.

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