Winpak Ltd.

Winpak Ltd. (TSX: WPK) is a manufacturer and distributor of packaging materials and related products across the North American market. WPK's products are mainly used for the packaging of perishable foods, beverages and healthcare applications.

Investment Rationale:

• Stable margin: Despite a demand destruction scenario, the company retained its margin, which is an indication of operational efficiency. The business witnessed significant headwinds from rising polypropylene and polyethylene resin costs, which was partially offset by a reduction in other raw material prices. Gross profit margins, on a year to date (nine-months) basis, stood at 31% of revenue, declined marginally from 31.6% as compared to the previous corresponding period (pcp).
• Resilient Business: The group manufactures and distributes high-quality packaging materials and related packaging machines. The company's products are categorized as the 'essentials' as it supplies packaging materials for food, beverage and healthcare players.
• Positive Outlook: WPK's product pipeline remains very strong, and the company secures several business opportunities through organic and inorganic sales growth. The management hinted of several product launches in the fourth quarter of FY20, which includes retort pet food tray and dessert custom container offerings, spouted pouches etc. We expect the above launches would likely to support the sales in the coming quarters. The management stated that specialty beverage cup business should no longer be a headwind to Winpak's volumes going forward on comparison to prior year quarterly time periods. The lidding product group experienced slight volume gains with the specialty beverage die-cut lids.  The packaging machinery segment remains very dynamic with a strong machine order backlog which will keep it busy entering 2021.

Q3FY20 Financial Highlights:

• Revenue stood at USD 210.605 million, reflecting a marginal decline from USD 212.734 million in Q3FY19. The decline was majorly attributed to the closure of restaurants and foodservice segments across several places in North America. Restaurant and foodservice segments recovered slightly during the quarter but remained muted during the period on account of to the reopening restrictions by the Provincial and State Governments.
• EBITDA stood higher at USD 49.096 million as compared to USD 48.764 million in pcp.
• The company reported net income at USD 27.372 million, as compared to USD 29.462 million in the previous corresponding period.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The second wave of the novel virus may dampen the demand of the group’s offerings, especially from the restaurant and foodservice segment. 

Valuation Methodology: Price to Earnings Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of WPK corrected 8% so far this year. We expect gradual reopening of restaurants and foodservice businesses across North America would likely to support the company's sales volume, which is a key positive. The flexible packaging operating segment reported volume growth of 1% on y-o-y basis. Furthermore, modified atmosphere packaging volumes advanced significantly, supported by the increased demand for retail meat and cheese products, non-COVID-19 related market share gains, and the inroads made within the Mexican market. We have valued the stock using Price to Earnings 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, Aptargroup Incetc. Considering the aforesaid facts, current price movement, we recommend a 'Buy' rating on the stock at the closing market price of CAD 43.26 on October 23, 2020.

WPK Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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