CCL Industries Inc.

CCL Industries Inc. (TSX: CCL.B) manufactures and distributes packaging and packaging-related products. The group derives its majority income from the CCL segment, which sells pressure sensitive and extruded film materials used for labels on consumer packaging, healthcare, automotive, and consumer durable products. Other segments include Innovia, Avery and Checkpoint.

Key Updates:

• Strong Technical Indicators: The stock of CCL.B closed above the long-term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish outlook. In the recent past, the stock gained momentum appreciated ~29% and ~61%, respectively in the last six months and nine months, respectively.

Source: Refinitiv (Thomson Reuters)

• Better margins than Industry: The group reported decent operational performance, which is reflected from its higher margins as compared to the industry, which is a key positive. Gross margin, EBITDA margin and operating margin in Q3FY20 stood 28.7%, 20.2% and 14.1%, respectively, as compared to the industry median of 25.1%, 16.5% and 11.7%, respectively. Moreover, the group reported its net margin at 9.4%, significantly higher than the industry median of 6.6%.
• Improved Sequential Performance: The group reported improved in revenue of CAD 1,357.1 million in Q3FY20, as compared to CAD 1,277.9 million in Q2FY20, while posted a gross profit of CAD 389.7million, as compared to CAD 351.2 million in Q2FY20. Operating income stood at CAD 191.1 million, significantly higher from CAD 153.6 million, a quarter ago. 

• Management Update: Recently, the group appointed Ms. Linda A. Cash and Dr. Susana Suarez-Gonzalez to its Board of Directors and confirmed the retirement of Ms. Mandy J. Shapansky from the post of Director. 

• Event Update: The group would disclose its Q4FY20 result on February 25, 2020.

Q3FY20 Income Statement Highlights:

• The group reported its quarterly results, wherein the group posted sales of CAD 1,373.4 million, as compared to CAD 1,357.1 million in the previous corresponding period (pcp). The increase was driven by higher income from CCL segment and Innovia segments, partially offset by a slide from Avery and Checkpoint segments.

Revenue Bifurcation (Source: Company Reports)

• Gross profit stood at CAD 419 million, higher than CAD 389.7 million in Q3FY19. The increase was supported by higher sales and lower cost of sales (CAD 954.4 million versus CAD 967.4 million in pcp).
• The quarter was marked by lower selling, general and administrative expenses (CAD 185 million versus CAD 198 million in pcp) and a lower finance cost (CAD 15.4 million versus CAD 18.8 million in pcp).
• Net earnings for the period stood at CAD 153.3 million, as compared to CAD 127.7 million in Q3FY19.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Price volatility of the raw materials coupled with supply interruption due to extended lockdown might dampen the company’s margins and cash flows.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock Recommendation:

The group reported higher adjusted EBITDA of CAD 839.3 million in 9MFY20, as compared to CAD 812.4 million, a year ago. Moreover, cash from operations stood higher at CAD 277.7 million and CAD 551.4 million respectively, for Q3FY20 and 9MFY20, as compared to CAD 258.2 million and CAD 480.8 million, respectively, in Q3FY19 and 9MFY19, supported by improved working capital management. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Winpak Ltd, Packaging Corp of America. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 66.15 on February 17, 2021.

CCL.B Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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