Cascades Inc. (TSX: CAS) is a paper and packaging company that produces, converts, and sells packaging and tissue products composed primarily of recycled fibres. The company operates into four main business segments: Containerboard, Boxboard Europe, Specialty Products (constitutes packaging products) and Tissue Papers.

Investment rationales

• Business operations come under essential services: The management is optimistic regarding operational performance as their production falls within essential tissue and packaging segments, and the adaptability demonstrated by the business segments within the challenging business environment.
• Strategic initiatives to improve the Tissue Group's profitability: The company is actively taking the strategic decisions to boost the profitability of the tissue business segment by closing down the old unit that was not performing well due to high logistic cost and ageing equipment.
• Healthy Cash flows: The company generated healthy cash flows in the last quarter. Increase in adjusted Free Cash Flow reflects higher Cash Flow from Operations and lower financing expense paid on Y-o-Y and Q-o-Q basis. The group is offering a hefty free cashflow yield of 21.9%.

Source: Company

Financial Overview: 2QFY20

Source: Company

• Sales decreased by 2% sequentially as the elevated Covid-19 related demand levels present in the first quarter eased. As expected, this resulted in lower volumes in all segments, except Specialty Products. Sales increased modestly when compared to the comparable period last year, supported by a 12.5% growth in Tissue.
• On an adjusted basis, second quarter 2020 Operating income before depreciation and amortization stood at CAD 186 million, versus CAD 156 million in the previous year.
• The company recorded net earnings of CAD 54 million, or CAD 0.57 per share, against net earnings of CAD 31 million, or CAD 0.33 per share, in the same period of 2019. On an adjusted basis the Corporation generated net earnings of CAD 58 million in the second quarter of 2020, or CAD 0.61 per share, against net earnings of CAD 26 million, or CAD 0.28 per share, in the same period of 2019.

Segment Information

Source: Company

Risk associated to Investment

Many factors played a pivotal role in the company’s business. Some of them are the effect of general economic conditions, decreases in demand, the prices and availability of raw materials, changes in the relative values of certain currencies, fluctuations in selling prices and adverse changes in the general market and industry conditions. Any ups and downs in these factors can play a vital role in the operations and financials of the company.

Valuation Methodology (Illustrative) – EV to Sales

Source: Refinitiv (Thomson Reuters)

Stock Recommendation

The outbreak of COVID-19 Pandemic has caused global widespread economic disruption. Looking ahead, the company is cautiously optimistic regarding operational performance given the weighting of their production that falls within essential tissue and packaging segments. The company is expecting their consolidated results to decrease sequentially, as benefits from favourable raw materials pricing are anticipated to be offset by lower expected volumes, notably in the Away-from-Home Tissue business and the usual lower seasonal third quarter volumes in Europe. Therefore, based on the above rationales and valuation, we have given a “Hold” rating at the closing price of CAD 15.98 on 22 October 2020.  We have considered Domtar Corp, Canfor Corp, Interfor Corp, West Fraser Timber Co Ltd etc. as the peer group for the comparison.

CAS daily technical chart. Source: Refinitiv (Thomson Reuters)

Canadian Pacific Railway Limited (TSX: CP), along with its subsidiaries, owns and operates a transcontinental freight railway in Canada and the United States. Currently, the company is operating on 12,500 miles of track.

Overview of Q3 2020 earnings

Key positive:

• Operating ratio stood at 58.2%, reflecting an improvement of 210 bps over the previous corresponding period (pcp).
• Freight revenue per carload was CAD 2,763 in 3Q 2020, an increase of CAD 49, or 2%, from CAD 2,714 in 3Q 2019.
• Fuel cost, which plays a significant role in achieving optimum margins came down to CAD 140 million against CAD 210 million in the same period of last year.

Key negative

• Revenues decreased by 6% to CAD 1.86 billion from CAD 1.98 billion in pcp.
• Operating income decreased by 10% to CAD 779 million from CAD 869 million in last year.
• Adjusted net income decreased by 13% to CAD 560 million from CAD 640 million in last year.
• Cash from operating activities decreased to CAD 493 million from CAD 823 million last year. Due to this, the free cash in 3Q 2020 was CAD 6 million compared to CAD 363 million last year.
• Long-term debt to Net income ratio increased to 4.2 from 3.9  

Source: Company

Dividend 

Risk associated to Investment

A volatility in the fuel prices may affect the Company’s results as fuel expense constitutes a significant account of the Company’s operating costs. Other risks involved in the business include low volumes due to shrinkage in demand, low agricultural productivity, train-derails, currency and interest rate fluctuations etc.

Valuation Methodology (Illustrative): EV to EBITDA

All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation

The effects of the COVID-19 pandemic on consumer demand has resulted in lower volumes in many segments from where the company draws their revenues, such as Energy, chemicals and plastics, metals, minerals and consumer products. However, the company mentioned that it had witnessed ~8% quarter to date growth in volume and expect the scenario to continue for the remaining year. CP expects a low-single-digit decline in revenue ton-miles in 2020 and at least mid-single-digit adjusted diluted EPS growth. CP continues to expect capital expenditures of CAD 1.6 billion in 2020. We have valued the stock using EV to EBITDA based multiple and have arrived at a target downside of single digit (in percentage terms). We have considered Canadian National Railway Co, Union Pacific Corp, etc. as the peer group for the comparison. Hence, we recommend a ‘Watch’ rating on the stock at the closing market price of CAD 415.11 on October 22, 2020.

CP daily technical chart. Source: Refinitiv (Thomson Reuters)     

Disclaimer

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