Cascades Inc. (TSX: CAS) is engaged in the production, conversion, and marketing of packaging and tissue products composed mainly of recycled fibers. The company is organized into four main business segments: Containerboard, Boxboard Europe, Specialty Products (which constitutes packaging products), and Tissue Papers.

Key Highlights:

• Increased revenue: During Q1FY22 the company reported an increase in the total revenue to CAD 1,038 million as compared to the total revenue of CAD 942 million in Q1FY21. The containerboard segment saw an uptick in the sales to CAD 534 million in the Q1FY22 against the sales of CAD 503 million in Q1FY21, contributing close to 50% to the overall sales. The second major segment, tissue papers reported revenue of CAD 314 million in the same period (Q1FY22) vs the revenue of CAD 292 million in Q1FY21. Below is the pictorial representation of the over-sales in Q1FY22 as compared to Q1FY21.

Source: Company filing

• Favorable outlook for the containerboard segment: In the North American market presents a vast opportunity for the containerboard segment to flourish, and the company generates the majority of the revenue from that segment only. It's stated the market for North America will grow at 2.7% CAGR from 2021 – to 20226, with the capacity expected to increase from 44.9 M Tons (million tons) in FY21 to 51.8 M Tons by FY26. The major reason for such a favorable backdrop is the shift in consumer behavior which increased the usage of various new categories like food, agriculture, etc, brand owners are now inclined towards innovative solutions with the higher usage of recycled content. The CAS is the 6^th largest containerboard producer in North America and has a great potential to expand the market share in the containerboard segment.

Source: Company presentation

• Bear Island project: To take the advantage of increasing demand for the containerboard, the company is working on its Bear Island project, where the total investment is revised upwards in the range from CAD 530 million to CAD 565 million, because of the rising cost of materials and labor. The group is optimistic and estimated the annual production close to 330,000 st (short tons) in FY23 at 70% production capacity and could be scaled to 450,000 st at 97% capacity by FY25. The OIBD (operating income before depreciation and amortization) from the Bear Island project is estimated to be between CAD 80 million to CAD 90 million by FY25.

Source: Company presentation

Risks associated with investment

The company is majorly exposed to the rising cost of materials and labor and any disruption in the supply chain because of COVID-19 restrictions, floods, etc could further dampen the company's operations and profitability margins.  

Financial overview of Q1FY22 (Expressed in millions of CAD)

Source: Company Filing

• The group reported an increase in the total revenue to CAD 1,038 million during Q1FY22, against CAD 942 million during Q1FY21. The higher sales were on account of increased revenue from the containerboard and tissue papers segment along with the improved selling prices and increase in total volumes sold in Q1FY22.
• During Q1FY22, the overall cost of sales and expenses increased to CAD 1,042 million as compared to CAD 898 million in Q1FY21. This resulted in the operating loss of CAD 4 million in Q1FY22 vs the operating income of CAD 44 million in Q1FY21.
• The group reported the net loss of CAD 15 million during Q1FY22 as compared to the net income of CAD 22 million in Q1FY21.

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

The group reported the OIBD (operating income before depreciation and amortization) of CAD 56 million in Q1FY22 against the OIBD (loss) of CAD 30 million in the previous quarter Q4FY21. The group's expansion plans and the bear island project which is estimated to produce 465,000 at 100% of its operational capacity in coming years along with the OIBD in between CAD 90 million to CAD 100 million, is a key positive. The favorable tailwinds for the containerboard segment across North America, where the CAS is the top 6^th major player, will also be a space for the company to expand and increase its market share.  On the valuation front, the stock is measured on the EV/ Sales based relative valuation multiple and currently, the stock is trading at 0.50x against the industry (basic materials) mean of 4.2x, implying the stock is still undervalued. We have considered Transcontinental Inc., and Imaflex Inc. as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stock of CAS at the last closing price of CAD 10.29 on June 1, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as of June 1, 2022). Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITV

Technical Analysis Summary

Disclaimer

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