Winpak Ltd

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

Key Highlights:

• Improved margins: The company reported improved profitability margins as compared to the industry median, which indicates higher operational efficiencies. Notably, in Q3FY21, the company reported EBITDA margin and operating margin of 15.8% and 11.1%, respectively, as compared to the industry median of 15.4% and 10.1%, respectively. Moreover, the company reported its net margin of 8.4% in Q3FY21, higher than the industry median of 6.4%.

• Higher dividend payment: In 9MFY21, the company paid total dividend of USD 164.055 million, significantly higher than USD 4.311 million in pcp. The above is impressive, as most of the companies are lowering their distributions in order to retain liquidity.

• Bullish Management Stance: For FY21, the group expects improved performance across its flexible packaging segment, supported by notable volume growth from retail protein and cheese products along with resilient activity from the biaxially oriented nylon film non-food retail and hospitality segments. In the recent past, the company saw strong momentum from the retort of pet food, snack food and specialized printed packaging products, and expect the momentum to continue in the coming quarters. Additionally, the management is focusing on additional opportunities within pharmaceutical customers and nutritional powder products, and the successful addition of clients would lead to improved business prospects.

Q3FY21 Financial Highlights:

• WPK announced its quarterly result, wherein the company posted revenue of USD 254.166 million, higher than USD 210.605 million in the previous corresponding period (pcp). The growth was driven by improved performance from all three segments of the company.
• Gross profit stood at USD 62.028 million, slide from USD 66.002 million in pcp, due to significantly higher cost of sales (USD 192.138 million v/s USD 144.603 million in pcp).
• Income from operations was down to USD 28.315 million, from USD 37.792 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 of USD 21.350 million, as compared to USD 27.372 million in pcp. The decline was due to higher expenses, partially offset by lower income tax.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: The majority of the company’s expenses are related to raw materials, and a surge in the raw material costs would lead to margin pressure and might dampen the company’s profitability. Moreover, the group’s performance is dependent on the changing consumer preferences, and hence shift in consumer preference would dampen the overall performances.

Valuation Methodology (illustrative): Price to Cash Flow

Stock Recommendation:

On a YTD basis, the rigid packaging and flexible lidding operating segment achieved volume growth of 9% from pcp, supported by significant advancement within the rigid container volumes due to rising demand for pet food trays coupled with the launch of dessert container products. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like CCL Industries Inc, Crown Holdings Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of WPK at the last traded price of CAD 36.83 on December 22, 2021.

*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 December 22, 2021). Analysis by Kalkine Group

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

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