Cascades Inc. (TSX: CAS) is engaged in the production, conversion and marketing of packaging and tissue products mainly composed of recycled fibres. The company is organized into four main business segments, namely, Containerboard, Boxboard Europe, Specialty Products (which constitutes packaging products), and Tissue Papers. 

Key highlights

• Divested Equity Position in RDM Group: Recently, the company announced that it has completed the sale of its 57.6% equity stake in Reno De Medici S.p.A, for an all-cash price of €1.45 per share corresponding to a total cash consideration of approximately €315.3 million (approximately CAD 461 million, before transaction related fees). We believe, the proceeds from this divestiture will not only support ongoing strategic modernization initiatives and key projects but will also allow Cascades to proactively manage its debt profile.
  

• Positive outlook of the Containerboard industry: The company derives its majority revenue from the Containerboard segment, and the outlook of the above segment is likely to stay positive in the North America Region. During FY21 to FY25, the capacity of the above segment is expected to increase by ~2.9% on CAGR basis to 50.2 million short tons (M.S.t), supported by improved demand dynamics. We believe, the company is highly poised to take advantage of this opportunity.

Source: Company Filing

• Strong working capital management: At the end of Q3FY21, the company showcased a prudent working capital management, indicating ample short-term liquidity, which is a key positive. During the tenure its quick ratio stood at 1.23x, respectively higher than the industry median of 1.0x. Furthermore, its adjusted free cash flow in the period stood at CAD 35 million against CAD 23 million in the previous corresponding period.
  

• Decline in total debt: On the back of robust business and its ability of securing healthy cash flows, the company is minimizing its total debt, which is a key positive. We believe the reducing debt would benefit the company in elevating its margins down the time.

Source: Company Filing

• Impressive dividend yield: Over the years, the company reported a consistent dividend payment backed by stable cash flows, which is impressive. Recently, the company paid a quarterly dividend of CAD 0.12 per common share The stock of CAS is carrying a dividend yield of ~3.486% on an annualized basis, which looks attractive considering the ongoing interest rate scenario.

Source: REFINITIV, Analysis by Kalkine Group

Financial overview of Q3 2021

Source: Company Filing

• In Q3 2021, the company reported sales of CAD 1,030 million grew by CAD 16 million, or 2%, compared with the previous corresponding period.
• On the back of slight lower operating expenses which stood at CAD 957 million, against CAD 960 million in Q3 2020, the company posted higher operating income of CAD 73 million, against CAD 54 million in pcp.
• The company reported net earnings attributable to shareholders at CAD 32 million in the reported quarter, against CAD 49 million in pcp, partially offset by higher provision for income tax.

Risks associated with investment

Many factors play a pivotal role in the Company’s business, like general economic conditions, decreases in demand, the prices and availability of raw materials, fluctuations in selling prices, etc. Any ups and downs in these factors can play a vital role in the Company's operations and financials. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The company’s third quarter performance reflects the ongoing dynamic nature of the North American macro environment and the announced production impact in the containerboard segment related to water effluent treatment system issues at the Niagara Falls complex. Looking ahead, the company is forecasting sequentially stable results for the fourth quarter, with the impact of inflationary pressures on input costs largely mitigated by steady demand and the roll-out of price increases in its business segments. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the current market price of CAD 13.77 on December 17, 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

1-Year price chart (as on December 17, 2021). Source: REFINITIV, Analysis by Kalkine Group.

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

Disclaimer

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