Winpak Ltd (TSX: WPK) manufactures and distributes a wide range of packaging materials utilized for foods, beverages, and healthcare applications.

Key Updates:

• Stretched Technical: On a daily chart, the relative strength index (RSI) of the WPK stock is trading higher at 63.98 levels, which suggests a possible correction from the current price level. Moreover, the stock has moved significantly higher than its 50-days and 200-days simple moving averages (SMA), which might also lead to a possible breakdown from the current level.

One-Year Technical Price Chart (as on May 06, 2022). Analysis by Kalkine Group

• Lengthy Cash conversion period: The company reported a significantly higher cash conversion period of 156.7 days in Q1FY22, as compared to the industry median of 43.7 days. A higher cash conversion period indicates that the company is taking higher time to convert its investment to cash flows.

• Elevated Raw material cost might lead to margin erosion: Raw material input costs remained elevated during the first quarter of FY22 due to the surge in oil and natural gas prices. Moreover, additional price increase by the resin producers for basic manufacturing ingredients like polypropylene and nylon might lead to a lower profitability margin for the group.
  

Valuation Methodology (illustrative): Price to Cash Flow

Analysis by Kalkine Group

Stock Recommendation:

Due to the ongoing sluggish economic scenario, the company might witness several headwinds from rising raw-material costs, disruption in supply-chain, poor revenue mix etc. These factors might dampen the company’s sales volumes and cash flows in the coming quarters. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like Packaging Corp of America, Graphic Packaging Holding Co etc. Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock of WPK at the last closing price of CAD 43.60 on May 06, 2022.

One-Year Technical Price Chart (as on May 06, 2022). Analysis by Kalkine Group

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

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