Winpak Ltd (TSX: WPK) manufactures and sells a variety of packaging materials and related packaging machines. The packaging materials are used primarily for perishable foods, beverages, and healthcare applications.

Key highlights

• Expanding Volumes: The combined volumes of the company increased by 10.1 percent, with all three operational segments contributing to the remarkable outcome. Quarterly volumes in the flexible packaging operational segment increased by 12%. Modified environment packaging volumes increased in particular as a result of enhanced demand for retail meat and cheese goods, as well as new frozen food packaging company. The reversal experienced by significant clients in foodservice, non-food retail, and healthcare that had been badly damaged by COVID-19 during the third quarter of 2020 boosted specialty film and biaxially oriented nylon volumes.

• Sequential improving revenues: The company's revenue in the third quarter of 2021 was USD 254.2 million, the greatest quarterly result in the company's history and a 20.7% increase over the prior year's comparable level of USD 210.6 million. Additionally, the company has experienced significant growth in recent quarters on a continuous basis, which is a highly good factor.

Source: Company Filing

• Bullish Management Stance: For FY21, the company anticipates improved results from its flexible packaging division, which will be bolstered by significant volume increase from retail protein and cheese goods, as well as steady activity from the non-food retail and hotel industries using biaxially oriented nylon film. The firm has seen good momentum in recent quarters from the retort of pet food, snack food, and specialist printed packaging products, and expects this to continue in the future quarters.
  

• Debt-free balance sheet with strong financial flexibility: In Q3 2021, the company has a strong balance sheet, which is virtually debt-free along cash and cash equivalents balance of USD 352.3 million. Moreover, despite a sluggish economic scenario, the group reported consistent net cash flow from operations before changes in working capital of USD 40.2 million. The company is likely to report lower finance costs in the coming quarters, which would further support the group’s profitability.

Risks associated with investment: The food-service segment accounts for a large portion of the company's revenue, and any further restrictions would result in a drop in total volumes and financials. Furthermore, the majority of the company's expenses are tied to raw materials, and a spike in raw material costs would put pressure on the company's margins, potentially reducing profitability.

Financial overview of Q3 2021 (In thousands of USD)

Source: Company Filing

• In Q3 2021, the company posted revenue of USD 254.1 million, higher than USD 210.6 million in the previous corresponding period. The growth was driven by improved performance from all three segments of the company.
• Gross profit stood at USD 62.0 million, fell from USD 66.0 million in pcp, due to significantly higher cost of sales (USD 192.1 million v/s USD 144.6 million in pcp).
• Income from operations was down to USD 28.3 million, from USD 37.7 million in Q3FY20. The decline was primarily due to higher sales, marketing & distribution expenses and higher Research and technical expenses.
• The company reported its net income at USD 21.3 million, compared to USD 27.3 million in pcp. The decline was due to higher expenses, partially offset by lower income tax.

Valuation Methodology (Illustrative): EV to Sales

Analysis by Kalkine group 

Stock recommendation

The company is an essential supplier of packaging materials and machinery within the food, beverage and healthcare segments and recorded a revenue of USD 254.2 million in Q3 2021, representing the highest quarterly result in the Company's history, along this its consolidated volumes also expanded by a sizeable 10.1% with all three operating segments contributing to the impressive result. Additionally, the industry beating margin profile along robust liquidity with virtual debt free balance sheet reflect the efficiency of the true company. Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 37.74 as on January 17, 2022. We have considered CCL Industries Inc, Aptargroup Inc, Packaging Corp of America, etc. as the peer group for the comparison.

*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

One-Year Technical Price Chart (as on January 17, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

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