Increase Demand to Drive Business Growth: Cascades Inc. (TSX: CAS) is a paper and packaging company which manufactures, transforms and sells packaging and tissue products primarily made out of recycled fibres. Despite sharp price correction in the broader market, the stock has outperformed the index by 40.05% in the last one month.

Dividend Update: The company announced a quarterly dividend of CAD 0.08 per share, up from CAD 0.04 per share.

Financial Overview: For the period ended 31^st December 2019, CAD reported a decent set of numbers which include 7% y-o-y growth in revenue of CAD 4,996 million. The growth was aided by higher selling prices primarily from Tissue Papers segment, which was partially offset by lower volumes across most of the business segments. Adjusted operating income before depreciation and amortization stood at CAD 604 million, depicting a growth of 24% on y-o-y basis. Improved results within the Tissue Papers segment, driven by more favorable average selling price followed by improved sales mix and lower raw material and energy costs supported growth in operating income before depreciation and amortization. Adjusted net earnings stood at CAD 96 million, implying a y-o-y growth of 22% from CAD 79 million in the prior year quarter.

FY19 Financial Highlights (Source: Company Reports)

Valuation Methodology: P/E- Based Relative Valuation

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

Stock Recommendation: The stock of CAS is quoting at CAD 12.57 with a market capitalization of 1.17 Billion. The stock has generated exuberant return of ~50% in the last one year, while outperformed the index by ~81.40% during the same timeframe. CAS reported decent growth in its business performance with improved ROA (12% vs 10.6% in FY18) and ROCE (5.4% vs 4.6% in FY18) driven by improved product mix and higher shipment. At current market price, the stock has generated an annualized dividend yield of 2.55%. Corrugated box industry across North America and Europe is expected to remain stable due to the nature of the product and its uses. The business is immune to the economic cycle and is evident from the stock price movement. We advise investors to accumulate CAS stock to stabilize their portfolio amid large market swings. Considering the aforesaid facts, we have valued the company using Price to Earnings (P/E) relative valuation method. We have taken peers like KP Tissue Inc (TSX: KPT), Domtar Corp (NYSE: UFS) and Norbord Inc (TSX: OSB) and arrived at a target price of double-digit upside (in% terms). Hence, we recommend a ‘Buy’ rating on the stock at closing market price of CAD 12.57, up 2.95% as on 31^st March 2020.

CAS One-Year Daily Price Chart (Source: Thomson Reuters)

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