CCL Industries Inc.

CCL Industries Inc. (TSX: CCL.B) manufactures and sells packaging and packaging-related products. The company operates through various segments. The CCL segment, which generates most of the revenue, sells pressure sensitive and extruded film materials used for labels on consumer packaging, healthcare, automotive, and consumer durable products.

Key highlights

• Healthy cash flows:In Q3 2020, the Company garnered CAD 277.7 million in cash from operating activities compared to CAD 258.2 million in Q3 2019, respectively. The group also witnessed an inflow of CAD 230.4 million in Free cash flow from operations compared to CAD 185.3 million in Q3 2019. The rise in net earnings was the sole driver of the improved cash provided by operating activities. For FY2020, the Company also raised its free cash flow expectations and believed in exceeding a mark of CAD 500 million.

Free Cash Flow from Operations (millions of CAD)

Source: Company

• Expanding operations in Malaysia: Recently the company has acquired Super Enterprises Printing (“SEP”) a leading supplier of decorative panels, liquid crystal & touch screen display covers, and in-mould decorated components for the consumer electronics and automotive sectors across Asia, for approximate CAD 20.0 million, based in Kuala Lumpur with a second manufacturing operation in Guangzhou, China. On TTM basis “SEP” reported sales of CAD 26.4 million, with adjusted EBITDA estimated at CAD 3.0 million.
• Reduced net debt:In Q3 2020, the company had reported net debts of CAD 1,650.9 million, down by CAD 65.3 million, as compared to CAD 1,716.2 million on December 31, 2019. As a result of this debt reduction, the company’s Leverage ratio stands at 1.51x of EBITDA. The company do not have any long-term debt maturity in FY2021.

Source: Company 

Financial overview of Q3 2020 (In millions of Canadian dollars)

Source: Company

• The Company reported sales of CAD 1,373.4 million, increased by 1.2% in Q3 2020 compared to CAD 1,357.1 million in Q3 2019. There was a decline of 2.5% on organic sale offset by acquisition-related growth and positive impact from foreign currency translation.

• In Q3 2020 the company’s gross profit stood at CAD 419 million, increased by CAD 29 million compared to CAD 390 million in Q3 2019, primarily due to low COGS. COGS as a % to revenue in Q3 2020 came down by 180 basis points (bps) to 69.5% compared to 71.3% in Q2 2019.

• The Company reported net earnings of CAD 153.3 million in Q3 2020, against CAD 127.7 million in Q3 2019, on the back of high gross profit and low finance cost and lower tax rate compared to the previous corresponding period. 

Risks in investment

The Company is exposed to many risks which could adversely affect the Company’s results of operations and financial conditions. Some of these risks are current economic conditions and uncertain economic forecast, fluctuations in raw material costs or the unavailability of raw materials, competition, consumer confidence and spending preferences, etc. 

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

The Company's ability to provide a wide range of products to multinational customers, with focused strategies to improved efficiency and lower costs, would help a lot in achieving improved numbers and margins. Recently the Company acquired one Malaysia based Company that is also going to support the company in many dimensions. The Company ended 3Q 2020 with a strong balance sheet driven by persistent free cash flows, lower net debt level and strong liquidity. Therefore, based on the above rationale and valuation, we have given a "Hold" rating at the closing price of CAD 58.83 on December 30, 2020.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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