Winpak Ltd

Winpak Ltd (TSX: WPK) manufactures and sells a wide range of packaging materials utilized for foods, beverages, and healthcare applications.

Key Highlights:

• Sign of Demand revival: The group reported improved volume growth from the rigid packaging and flexible lidding operating segments, supported by the increase in rigid container volumes, due to the new custom pet food tray and dessert container product launches. Moreover, the increase was due to the large expansion in condiment container activity. The group witnessed higher demand from modified atmosphere packaging products, supported by enhanced demand with respect to customers who caters to the retail meat and cheese markets. We expect the momentum to continue in the coming quarters.

• Healthy Balance sheet: The company is virtually debt free, which is a key positive as it indicates the company’s cash flows are sufficient to fund its short term and long-term capital needs. A zero-debt balance sheet indicates no finance costs, which subsequently support the company’s cash flow and profitability.

• Higher Dividend Distribution: The company distributed higher dividends despite the ongoing sluggish economic scenario, which is encouraging. Notably, dividend distribution increased to USD 3.068 million in H1FY21, higher than USD 2.885 million a year ago. This shows the company’s confidence in its cash flow generation ability.

Q2FY21 Financial Highlights:

• WPK announced its quarterly result, wherein the company posted revenue of USD 243.969 million, higher than USD 216.201 million in the previous corresponding period (pcp). The growth was driven by improved performance from all three segments of the company.
• Income from operations stood marginally lower at USD 38.468 million from USD 40.386 million in Q2FY20. The quarter was marked by higher sales, marketing and distribution expenses and research & technical expenses.
• The company reported its net income of USD 29.439 million, as compared to USD 29.920 million in pcp. The marginal decline was primarily due to lower income from operations, partially offset by lower finance expense (USD 0.464 million v/s USD 0.613 million in pcp).

Source: Company Report

Risks: The majority of the company’s expenses are related to raw materials, and an increase in the raw material prices would result in margin pressure, which would take a toll on the company’s profitability. Moreover, the group’s performance is dependent on the changing consumer preferences and a major change towards other products might lead to lower volumes.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

At the end of second quarter FY21, the group reported a higher liquidity and posted a cash balance of USD 513.3 million, increased from USD 495.346 million in Q4FY20. As per the management, the flexible packaging segment is expected to continue to generate prominent volume growth from the retail protein and cheese segments coupled with optimistic activity from the biaxially oriented nylon film non-food retail and hospitality markets. The group is also focusing on increasing its presence within the medical segments, which is expected to deliver improved prospects in the coming days due to the rising demand from the specific sector. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Packaging Corp of America, CCL Industries Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 40.45 on July 26, 2021.

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

Technical Analysis Summary

One-Year Technical Price Chart (as on July 26, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Stelco Holdings Inc

Stelco Holdings Inc (TSX: STLC) is a steel company engaged in the production and selling of steel products for customers in the steel service center, appliance, automotive, energy, construction, pipe and tube industries in North America. The company's product offering includes Stelco Hot Roll Products, Hot Roll Automotive, Stelmax 80, Stelmax 90, Stelmax 100.

Why Should Investor Book the Profit?

• Consistently deteriorating operating matrix: The company’s margin profile is shrinking continuously on a sequential yearly basis. During FY 2020, STLC’s gross margin declined to 2.7% from 5.2% a year before, operating margin turned negative to 1.3% from 2.4%, and net margin fell to -10.5% from 1.1%. A continues decline is a sign of worry.

• Decline in cash from operating activities: In Q1 2021, the company reported lower cash from operations at CAD 78 million compared to CAD 108 million in the previous corresponding period. The decline was primarily due to an increase in cost of goods sold. Even the net cash position at the reported period fell drastically to CAD 47 million against CAD 232 million in the previous corresponding period.

• Highly Leveraged Balance Sheet: At the end of Q1 2021, STLC’s Debt/Equity position stood at 0.83x whereas industry median is 0.22x. Moreover, debt protection metrices is also weak, with Long-Term Debt to Total Capital stood at 42.2% whereas industry median stood at 12.8%. This implies poor debt protection metrics.

• Poor Liquidity Profile: The company’s quick ratio in Q1 2021, stood at 0.56 compared to industry median at 1.56. Although it was better than the last sequential quarter, but still, it shows that company’s short-term liabilities are higher than the resources it is having to meet them.
  

• Trading above the upper band of the Bollinger Bands®: The stock witnessed a healthy rally on the daily price chart, and it has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, on the weekly chart the momentum oscillator RSI (14-Period) is trading at ~71.48 levels, also indicating the stock is in overbought zone and there is possibility of price consolidation.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

In Q1 2021, the company posted healthy numbers but on the contrarian its cash flow from operations declined to CAD 78 million compared to CAD 108 million and net cash position also fell drastically to CAD 47 million against CAD 232 million respectively, compared to the previous corresponding period. The Company is also having a highly leveraged balance sheet and its quick ratio is also below the industry median. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 39.61 on July 26, 2021.

One-Year Technical Price Chart (as on July 26, 2021). Source: REFINTIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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.