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

• Recent Acquisition to Drive Growth: Recently, the company announces the bolt-on acquisition of Vista Graphic Communications, LLC, an Indianapolis, Indiana based provider of print and folding carton packaging. This acquisition would bring them closer to their growing e-commerce customer base in the U.S. and provides them with much-needed print and converting capacity to meet the existing and growing demand for their customized patent-protected e-commerce packaging solutions. Vista Graphic Communications, LLC is a printing and packaging solutions manufacturer focused on highly customized folding cartons and micro flute packaging. 

• Solid Q4FY20 Performance: The company reported strong performance in the fourth quarter of FY20, led by an 11.1% surge in total revenue to CAD 54.6 million, from CAD 49.2 million in the same quarter of the previous financial year. Packaging and specialty products segment revenue increased by 5.4% to CAD 14.2 million. Adjusted EBITDA was up 37.5% to CAD 9.2 million, from CAD 6.7 million in Q4FY20. 

• Strengthening the Envelope Platform: On February 18, 2020, Supremex announced the acquisition of substantially all of the assets of Royal Envelope Ltd and Envelope Royal Inc., together (Royal Envelope), a leading Eastern Canada based envelope manufacturer and printer, for a total purchase price of CAD 27.4 million. The integration of the Royal Envelope also allows the company to better allocate any underutilized production capacity to supply a portion of growing demand coming from the United States. The business has been fully integrated and has generated significant operational and cost synergies to the envelope platform. 

• Implemented Cost Saving Measures: Supremex announced a plan to further optimize its Canadian envelope operations by reducing expenses and improving resource allocation. The company would be closing its Edmonton facility and reducing its Canadian envelope facility headcount by a total of 39 employees, or approximately 5% of its total workforce. These measures are expected to bring annual cost savings of approximately CAD 2.3 million before taxes, which began to materialize in the fourth quarter of 2020 and are expected to continue throughout the first three quarters of 2021 as operations wind down in Edmonton. 

• Increased Focus on Folding Carton and E-Commerce Packaging: Supremex’ objective is to drive profitable growth of its Packaging and Specialty Products segment by focusing on its value-added folding carton offering primarily targeting the premium food, pharmaceutical and health and beauty industries while supporting organic growth of its custom e-commerce packaging offering. The latter has performed well in 2020, with the onboarding of new e-tailer customer relationships and has been a significant contributor to growth and profitability since the second quarter of 2020. In 2021, the company would focus on driving further profitable growth of its Packaging and Specialty Products segment by improving production efficiencies and growing customer relationships. 

• Significant Improvement in Net Cash Flow from Operations: Net cash flows from operating activities stood at CAD 37.0 million during the twelve-month period ended December 31, 2020, compared with CAD 20.2 million in the equivalent period of 2019. The improvement was mainly attributable to a CAD 12.5 million positive net change in working capital adjustments and higher Adjusted Net Earnings. 

• Bullish Price Momentum: SXP shares are hovering in a long-term bullish zone, as the stock traded well above the crucial long-term support level of 200-day SMA and also traded above the short-term support levels of 50-day and 30-day SMA. Recently its shares took support near 50-day SMA and bounced back again. Also, the 14-day RSI is at 50.45, reflecting a bullish bias in the stock.

Technical Price Chart (as on March 09, 2021). Source: Refinitiv (Thomson Reuters) 

• Risks Associated to Investment:
  • Seasonality risk: Supremex’ revenue is subject to the seasonal advertising and mailing patterns of its customers. Most revenues from packaging and specialty products are not subject to seasonal patterns (i.e. specialty folding cartons for large multinational 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: Q4FY20

Source: Company Filing

• During the fourth quarter of FY20, the company’s revenue increased by 11.1% to CAD 54.6 million, from CAD 49.2 million in the fourth quarter of 2019. This was mainly driven by the Envelope segment revenue growth of 13.2% to CAD 40.5 million, and Packaging and Specialty products segment revenue increased by 5.4% to CAD 14.2 million, respectively.
• Operating earnings before depreciation, amortization and other items improved by ~37% to CAD 9.2 million against CAD 6.6 million reported in the same quarter of the previous financial year. However, on account of one-time asset impairment of CAD 2.77 million and restructuring expenses of CAD 1.83 million, the group’s operating earnings plummeted to CAD 0.96 million as compared to CAD 3.99 million in the same period of the previous financial year.
• The company’s adjusted EBITDA for the quarter under review was up 37.5% to CAD 9.2 million, from CAD 6.7 million in the fourth quarter of 2019.
• Further, the company’s adjusted EBITDA margin also expanded to 16.9% in Q4FY20 as compared to the adjusted EBITDA margin of 13.6% in the same period of the previous financial year.
• Further, the company’s net earnings were lower on account of a significant plunge in operating profit led by higher asset impairment charges and restructuring costs, but the company’s adjusted net earnings were at CAD 3.7 million (or CAD 0.13 per share), up from CAD 2.3 million (or CAD 0.08 per share), in the previous corresponding quarter of 2019.

Source: Company Filings 

• Revenue from the Canadian envelope market was CAD 27.5 million, up 15.0% or CAD 3.6 million from CAD 23.9 million in the fourth quarter of 2019. The growth was driven by a volume increase of 20.4%, 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 from the effect of the COVID-19 pandemic on non-essential envelope demand.
• Revenue from the U.S. envelope market was CAD 13.0 million, representing an increase of 9.7% or CAD 1.1 million from CAD 11.9 million in the fourth quarter of 2019. The growth was driven by the volume of units sold increased by 13.0% from market share gains and, to a lesser extent, demand related to the vote-by-mail initiative ahead of the 2020 U.S. elections.

Source: Company Filing

Top 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: 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 reported solid growth in both the operating segments in the fourth quarter and fiscal year ended on December 31, 2021. The envelope segment revenue was CAD 40.5 million, an increase of 13.2% or CAD 4.8 million, from CAD 35.7 million in the equivalent quarter of 2019. The growth was driven by the solid performance of the segment in both Canada and US markets and witnessed volume spurt in both geographies.

Further, the company has increased its focus on Folding Carton, and E-Commerce Packaging segment as Specialty products did well in 2020 with the onboarding of new e-tailer customer relationships and has been a significant contributor to growth and profitability since the second quarter of 2020.

Also, in 2021, the company would focus on driving further profitable growth of its Packaging and Specialty Products segment by improving production efficiencies and growing customer relationships. Secondly, it would dedicate additional resources to help gain market share in the custom e-commerce packaging space and, thirdly, improve the contribution of the corrugate manufacturing facility. In order to support these objectives, Supremex has hired Robert B. Young, an industry veteran, to the newly created position of President, Supremex Packaging Division.

Moreover, technical indicators are indicating a bullish price trend in the stock, as the stock is trading above the crucial short-term as well as long-term support levels of 50-day and 200-day SMA.

Therefore, based on the above rationale, the risk associated and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 2.18 on March 09, 2021. We have considered Neenah Inc, Glatfelter Corp, and Domtar Corp etc., as a peer group for comparison purpose.

1-Year Price Chart (as of March 9, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at March 10, 2021 price as well.

Disclaimer

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