CCL Industries Inc. (TSX: CCL.B) manufactures and sells packaging and packaging-related products like pressure sensitive and extruded film materials, used for labels on consumer packaging, healthcare, automotive, and consumer durable products. 

• Expansion Strategy: The company recently announced a significant expansion across its Innovia business unit near Leipzig in Germany. The group will be installing a new technology for innovative label films, with 36,000 tons of annual capacity designed for best-in-class energy efficiency. Production is likely to commence during the second half of 2024 with most of the capital deployed across 2023 and 2024. This is in-line with the growing demand for Pressure Sensitive Labels across the globe.

• Strong results from Checkpoint operation: The company reported solid traction from its checkpoint segment and reported sales of CAD 203 million in Q1FY22, jumped from CAD 168.7 million in pcp. Checkpoint manufactures technology-driven loss-prevention, inventory-management and labelling solutions, which includes radio frequency and radio frequency identification (RFID) solutions, targeted primarily to the retail and apparel industry. We expect the above momentum to sustain in the coming quarters driven by elevated demand for the company’s offerings.

• Industry beating profitability margins: The company reported strong profitability margins, wherein EBITDA and operating margins were recorded at 19.8% and 14%, respectively, in Q1FY22, higher than the industry median of 14.8% and 9.4%, respectively. Net margin stood at 9.9% in Q1FY22, higher than the industry median of 6.3%.

Risk Associated with the investment:

Almost 98% of the end users are denominated in foreign currencies, and hence a volatility in the foreign exchange rates would dampen the company’s sales and profitability. Moreover, the company might face steep competition from other manufacturers which might lead to loss of market share.

Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• B announced its first quarter FY22 result, wherein the company posted its sales of CAD 1,521.7 million, stood higher than CAD 1,349.5 million in pcp. Sales increased due to an organic growth rate of 10.8%, acquisition-related growth of 4.5% partially offset by 2.5% negative impact from foreign currency translation.
• The group reported a higher gross profit of CAD 412.9 million from CAD 387.1 million in pcp, thanks to the elevated revenue, partially offset by a significant rise in cost of sales.
• The company reported a rise in selling, general & administrative expenses, while finance costs stood at in-line with the previous corresponding period. Earnings before income tax stood at CAD 197.7 million, grew from CAD 194.4 million in pcp.
• The group reported net earnings of CAD 150.2 million, as compared to CAD 147.8 million in pcp, thanks to elevated earnings before income tax, partially offset by a slightly higher income tax expense.

Valuation Methodology (Illustrative): Price to Earnings based

Analysis by Kalkine Group

Stock Recommendation:

The company ended its first quarter on a positive note and reported growth from all its operating segments, which is encouraging and indicates higher demand for its products. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Winpak Ltd, Aptargroup Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of CCL.B at the last closing price of CAD 61.86 on May 17, 2022.

One-Year Technical Price Chart (as of May 17, 2022). Analysis by Kalkine Group

The reference data has been partly sourced from REFINITV

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