CCL Industries Inc.

CCL Industries Inc. (TSX: CCL.B) manufactures and sells packaging and packaging-related products. The company operates through various segments. CCL segment, which generates most of the revenue, sells pressure sensitive and extruded film materials used for labels on consumer packaging, healthcare, automotive, and consumer durable products.

Key highlights

• The company expands in Malaysia: The company has signed a binding agreement to acquire Super Enterprises Printing (“SEP”) a leading supplier of decorative panels, liquid crystal & touch screen display covers, and in-mould decorated components for the consumer electronics and automotive sectors across Asia, for approximate CAD 20.0 million. SEP is based in Kuala Lumpur with a second manufacturing operation in Guangzhou, China. On TTM basis “SEP” reported sales of CAD 26.4 million, with adjusted EBITDA estimated at CAD 3.0 million. The deal is expected to be closed by this year-end.
• Healthy cash flows:In Q3 2020, the Company generated cash from operating activities of CAD 277.7 million, as compared to CAD 258.2 million in Q3 2019. There was an inflow of CAD 230.4 million in Free cash flow from operations in Q3 2020 as compared to CAD185.3 million in Q3 2019. The rise in net earnings was the sole driver of the improved cash provided by operating activities.

Source: Company

• Raised FY20 free cash flow estimate:The company has expanded its free cash flow expectations and believes in exceeding a mark of CAD 500 million for FY2020.
• Reduced net debts: In Q3 2020, the company had reported net debts of CAD 1,650.9 million, down by CAD 65.3 million, as compared to CAD 1,716.2 million at December 31, 2019.

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the Company reported sales to CAD 1,373.4 million, up by 1.2% as compared to CAD 1,357.1 million in Q3 2019. There was a decline of 2.5% in the organic sale, which was offset by acquisition-related growth and positive impact from foreign currency translation.

• The Company posted a gross profit of CAD 419 million, up by CAD 29 million compared to CAD 390 million in Q3 2019, primarily due to low COGS. COGS as a % of revenue in Q3 2020 came down by 180 basis points (bsp) to 69.5% as compared to 71.3% in Q3 2019.

• The Company reported net earnings of CAD 153.3 million in Q3 2020, as compared to CAD 127.7 million in Q3 2019. The growth was driven by higher gross profit along with low finance cost and lower tax rate as compared to the previous corresponding period. 

Risks associated with investment

The Company is exposed to many risks which could adversely affect the Company’s results of operations and financial conditions. Some of these risks include current economic conditions and uncertain economic forecast, fluctuations in raw material costs or the unavailability of raw materials, competition, and consumer confidence and spending preferences, etc. 

Valuation Methodology (Illustrative): Price to Earnings

Note: All forecasted figures and peers have been taken from Refinitiv (Thomson Reuters)

Stock recommendation

The Company's ability to provide a wide range of products to multinational customers on a global basis, with focused strategies to improved efficiency and lower costs is going to help them in improving numbers and margins. The Company completed 3Q 2020 with a stronger balance sheet driven by persistent free cash flows, reduced the net debt level along with strong liquidity position with cash-in-hand of CAD 760.2 million and USD 1.2 billion under undrawn revolving credit facility reflects the financial strength of the Company. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 58.37 as on 16 November 2020 with a single digit upside potential. We have considered Sonoco Products Co, Winpak Ltd, Avery Dennison Corp etc. as the peer group for the comparison.

One year daily technical chart. Source: Refinitiv (Thomson Reuters)

Intertape Polymer Group Inc

Intertape Polymer Group Inc. (TSX: ITP) manufactures and sells a variety of packaging products. The firm's primary product categories include tapes, films, and woven coated fabrics.

Key highlights 

• Guidance: The management has shared their guidance regarding Q4 2020, where they expect to clock an increase of over 10% in revenue. Adjusted EBITDA would be in the range of USD 58-USD 63 million and free cash flows would be in a bracket of USD 35-USD 45 million. For FY20, capex is likely to be in the range of USD 45-USD 50 million, while for the upcoming quarter it will be around USD 12.5 million.

• Increase in Dividend:The company has increased the annualized dividend by 6.8% from USD 0.59 to USD 0.63 per common share. Accordingly, the company declared a dividend of USD 0.1575 per common share, which will be paid on 31 Dec 2020, with a record date of 15 Dec 2020. 

• Effectively managing working capital:In Q3 2020, the company generated Cash flows from operating activities of USD 67.5 million, increased by USD 19.2 million as against USD 48.3 million in Q3 2019. Free Cash Flows stood at USD 59.2 million, up 52% on an annual basis. 

Financial overview of Q3 2020

Source: Company 

• Revenue increased by 10.0% to USD 323.0 million in Q3 2020 as compared to USD 294 million in Q3 2019, primarily due to increased demand in products with significant e-commerce end market exposure including water-activated tape and protective packaging.

• The company posted a gross profit of USD 84 million, increased by USD 20 million compared to USD 64 million in Q3 2019, primarily due to low COGS, and continued cost savings initiatives implemented in the prior quarter. COGS as a % of revenue in Q3 2020 came down by 450 basis points (bsp) to 73.7% as compared to 78.2% in Q2 2019.

• Adjusted EBITDA increased by 40.1% to USD 64.5 million primarily due to an increase in gross profit.

• In Q3 2020 the Company reported Net earnings attributable to the shareholders at USD 26.7 million, up USD 14.2 million as compared to USD 12.5 million in Q3 2019. 

Risk associated with investment

The Company is exposed to many risks which could adversely affect the Company’s results of operations and financial conditions. Some of these risks include current economic conditions and uncertain economic forecast, fluctuations in raw material costs or the unavailability of raw materials, competition, and customer preferences, etc. 

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

The company witnessed significant growth from the e-commerce segment, which supported its revenue numbers as well as EBITDA. The group has taken some prudent steps regarding inventory management and cost control, which subsequently resulted in an improved bottom line. The company managed its working capital effectively and generated free cash flows. Further, the management is also optimistic and gave a decent outlook for Q4 2020, which is encouraging. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 22.49 on November 16, 2020 with a single-digit (in percentage terms) upside potential. We have considered Nitto Denko Corp, Scapa Group PLC, Avery Dennison Corp etc. as the peer group for the comparison.

One year daily technical chart. Source: Refinitiv (Thomson Reuters)

Disclaimer

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