Supremex Inc (TSX: SXP) is a leading North American manufacturer and marketer of envelopes and growing provider of folding cartons, corrugated boxes, labels and e-commerce packaging solutions. Supremex operates facilities across seven provinces and has three facilities in the United States. The group 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

Business                                                                  Geography                                                                                             

Investment Rationale

• Expansion in the US Packaging Market Bodes Well for Supremex: The packaging group recently announced bolt-on acquisition of Vista Graphic Communications, LLC, an Indiana based provider of print and folding carton packaging. This acquisition would bring it closer to the growing e-commerce customer base in the US and provides the group with a much-needed print and converting capacity to meet the existing and growing demand for customized patent-protected e-commerce packaging solutions. 

• Significant Jump in the Operating Cash Flow: During the full year 2020, the group’s cash flow from operations gigantically improved by 83% to CAD 37.03 million as compared to CAD 20.18 million in the previous corresponding period. This was largely driven by the strong financial performance of the company, which led to increased net earnings on a YoY basis and significant improvement in the working capital. Improved cash flow would bolster the group’s performance and capacity expansion in the near term. Also, the company could increase the shareholder returns through higher dividend payment; however, given the uncertainties hovered throughout 2020, the company’s total dividend payment in 2020 was half of what it paid in 2019, as it was prudent to keep cash within the business amid a time of great uncertainties.

Source: Kalkine Group, Annual Report

• Folding Carton and E-Commerce Packaging to Driving Growth: Supremex’ objective is to drive profitable growth of its Packaging and Specialty Products segment by focusing on the value-added folding carton offering, primarily targeting the premium food, pharmaceutical and health and beauty industries, while supporting organic growth of the 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. More importantly, during the Q4FY20, the company’s Packaging & specialty products contribution to revenue significantly improved to 16.4% from 6% reported in the same quarter of FY19. 

• 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. At the date, the business has been fully integrated and has generated significant operational and cost synergies to the envelope platform. 

• Long-term Bullish Trend is Largely Intact: At the last traded price, its shares settled well above the long-term crucial support levels of 200-day SMA, with Price/200-day SMA ratio stood at 1.29x. This implies that the stock is hovering approximately 29% above the long-term moving average of 200-day SMA. However, in the last couple of sessions, SXP shares did witness some price consolidation, but the overall long-term trend is largely intact. Further, the 14-day RSI is hovering in a neutral zone at 48.9. Therefore, we remain bullish on the stock at the current price level.

Technical Price Chart (as on May 04, 2021). Source: Refinitiv (Thomson Reuters)

• Risks Associated to Investment: The company’s business model is exposed to a variety of risks ranging from a) Seasonality risk: Supremex’ revenue is subject to the seasonal advertising and mailing patterns of its customers; b) Credit risk: The accounts receivable and credit risk stems primarily from the potential inability of clients to discharge their obligations, and c) 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. The growth was mainly driven by the Envelope segment revenue growth of 13.2% to CAD 40.5 million, while Packaging and Specialty products segment revenue increased by 5.4% to CAD 14.2 million.
• Operating earnings before depreciation, amortization and other items significantly 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 an 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 Filing 

• Revenue from the Canadian envelope market stood at CAD 27.5 million, up 15.0% or CAD 3.6 million from CAD 23.9 million in the fourth quarter of 2019. This 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 came in at 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. This was on account of 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 38.73% of the total shareholding. Jerry Zucker Revocable Trust is the entity holding maximum shares in the company at 21.72%, 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%, respectively.  

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: Supremex Inc. shares saw a price rise of over 26% in the past 1-year, led by the bolstered financial performance it reported in the last year, with solid topline growth, expansion in margin profile and strong cash position.

Also, strategic acquisition over the past six months is strengthening future prospects of the company's operations both in Canada and the US market. Vista Graphic Communications, LLC acquisition would bring the company closer to the growing e-commerce customer base in the US.

Moreover, Supremex's increased 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. And the company is diligently working to drive profitable growth in 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.

From the technical standpoint, its shares are hovering in a long-term bullish trend, with stock traded well above the 200-day SMA and 14-day RSI hovering in positive territory. Based on technical analysis, the stock has support at CAD 1.75 level. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 2.21 on May 04, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

1-Year Price Chart (as of May 4, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid on May 05, 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.