Supremex Inc (TSX: SXP) is a leading North American manufacturer and marketer of envelopes and a growing provider of paper-based packaging solutions. Supremex operates 13 facilities across six provinces in Canada and three facilities in the United States employing approximately 850 people. Supremex’ growing footprint allows it to efficiently manufacture and distribute envelope and packaging solutions designed to the specifications of major national and multinational corporations, resellers, government entities, SMEs and solutions providers. 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. It also manufactures and distributes a diverse range of packaging and specialty products, including corrugated boxes, high quality folding carton packaging and e-Commerce Fulfillment Packaging solutions.

Investment Rationale

• Insiders Remain Net Buyer Throughout 2020: Throughout 2020, the insiders remain net buyer and utilized COVID-19 lead free fall in the stock as an opportunity to accumulate shares at a discounted price. Over the past year, insiders increased their stake ten times, which implies that management is quite bullish on the group future. Recent buying transactions indicate that despite an approximately 50% recovery from 52Week’s low, insiders still feel that the stock is available at a fair price. Also, this should bring a lot of confidence in the investor’s community.

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

• Stock Entered in the Bullish Price Zone: Shares of SXP registered a breakout on the daily price chart, with price crossed over its long-term resistance of 200-day SMA on November 18, 2020 and since then SXP shares are moving higher. Also, at the last closing price of CAD 1.66, its shares traded approximately 13% above the long-term support level. Also, at the last closing price, its shares traded above all the crucial immediate, short-term as well as long-term support levels of 5-day, 10-day, 20-day, 30-day, 50-day, 100-day and 200-day SMAs, making the prevailing trend more stronger.

Technical Price Chart. Source: Refinitiv (Thomson Reuters)

• Strong Upside Momentum: The leading momentum indicator, the Moving Average Convergence Divergence (MACD) is edging higher, with the difference between 12-day and 26-day EMA is positive and oscillating well above its 9-day SMA signal, a bullish technical indicator. Further, momentum is getting volume support with 5-day traded volume was significantly higher than average 30-day traded volume. The group’s shares have bagged approximately 12% in the past 5-day trading sessions and surged approximately 32% in a month over period, implies that volume is chasing the momentum.

Technical Price Chart. Source: Refinitiv (Thomson Reuters)

• Strong Relative Strength: SXP shares have registered a solid relative outperformance against the benchmark and sector peer’s over the past 3-Months, 1-Month and 5-day. Over the past three months, its shares have outperformed the benchmark index by ~28%, ~19% in a moth and ~9% in the past five trading sessions. Volume spurt, bullish technical momentum indicators and relative price outperformance imply a strong relative strength in the stock.

• Solid Third Quarter Performance: In the third quarter of 2020, the company reported a 10.4% surged in revenue over the corresponding previous financial year, driven by 6.9% improvement in revenue from envelope segment and 18.9% surge in revenue from the packaging and specialty products segment. Further, EBITDA and Adjusted EBIDTA leapt up approximately 49.3% on y-o-y basis, driven by revenue from the packaging and specialty products segment. Further, Adjusted EBITDA margins increased to 16.2% compared to 12.0% in the equivalent quarter of 2019. 

• Risk Associated with Investment: In light of the recent COVID-19 pandemic, it can be reasonably assumed that demand for certain of the company’s product categories will continue to be negatively affected. Further breakout of COVID-19 may impact the demand and hamper the supply chain.

Financial Highlights: Q3FY20

Source: Company Filing

• Total revenue for the three-month period 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 stood at 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 on boarded 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.
• Operating expenses for the three-month period ended September 30, 2020, stood at 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%. Excluding the CEWS, operating expenses were 71.6%.
• EBITDA and Adjusted EBITDA stood at 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% of revenue 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 stood at 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 stood at 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 38.5% of the total shareholding. Jerry Zucker Revocable Trust. is the entity holding maximum shares in the company at 21.47%. Claret Asset Management Corporation is the second-largest shareholder, with a holding of 9.99%. Institutional ownership in the company stood at 15.79%, and strategic ownership stood at 22.08%.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to Sales

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

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: The company reported solid third-quarter results, with revenue improved by 10.4% on a YoY basis, driven by 6.9% improvement in revenue from envelope segment and 18.9% surge in revenue from the packaging and specialty products segment.

The company is focused on extracting operational leverage, profitably grow the packaging platform and creating shareholder value. The company has a secured credit facility consisting of a CAD 80 million revolving facility and a CAD 30.6 million term credit facility. Further, no principal repayments are required on the revolving operating facility prior to maturity.

From the technical standpoint, SXP shares are hovering in a bullish zone, with stock registered a breakout on the daily price chart and breached its crucial long-term support level of 200-day SMA and since then the stock has consistently moved higher. The Price/200-day SMA ratio of the SXP shares stood at 1.13x implies that the stock has created new strong support at its 200-day SMA of CAD 1.46.

However, the next wave of COVID-19 outbreak could weigh on the group’s performance in near time.

Therefore, based on the above rationale and valuation, we have given a ‘Speculative Buy’ recommendation at the closing price of CAD 1.66 on November 24, 2020.

*Recommendation is valid at November 25, 2020 price as well.

Disclaimer

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