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, namely, Containerboard, Boxboard Europe, Specialty Products (which constitutes packaging products), and Tissue Papers.

Key Updates:

• Growth from eCommerce to support packaging demand: In the recent past, we have seen tremendous growth in eCommerce platform, due to the changing buying pattern of the consumers. Notably, the industry is witnessing an upsurge in online orders primarily due to an increasing order for Food & Beverage items, medicines, industrial products, etc. This has resulted in higher demand for corrugated boxes, consumer products packaging items, industrial packaging products, etc., and supported the company’s overall sales volume. Continuation of the above trend is likely to support the group’s upcoming performances.

• Stable Dividend Payment: Historically, the company reported a consistent dividend payment backed by stable cash flows, which is impressive. The stock of CAS has an annualized dividend yield of ~3.724%, which looks lucrative considering the ongoing interest rate scenario. Moreover, in 9MFY21, the company reported a dividend payment of CAD 29 million, higher than CAD 22 million in pcp.

Five years dividend distribution (Source: Refinitiv)

• Prudent working capital management: The company has prudent working capital management, which indicates the group is well managing its short-term liabilities with its current assets. Notably, the quick ratio was recorded at 1.23x in Q3FY21, higher than the industry median of 1.0x. Additionally, the company’s cash cycle days, during the quarter, stood lower at 34.8 days, versus the industry median of 42.6 days. This indicates that the group is efficient to convert its investments in inventory and other resources into cash flows. 

Risks: Due to the spread of the Omicron variant during the last two weeks of December, the company faced supply chain disruptions, shortage of labor, unplanned production downtime. This might impact the company’s overall performance.

Q3FY21 Financial Highlights:

Q3FY21 Income Statement Highlights (Source: Company Report)

• CAS declared its quarterly result, wherein the company posted its sales of CAD 1,030 million, as compared to CAD 1,014 million in pcp. The improvement was primarily attributable to higher income from the Packaging Products segment (CAD 996 million v/s CAD 880 million in pcp), partially offset by the sluggish performance from the tissue-paper segment (CAD 344 million v/s CAD 364 million in pcp)
• The quarter witnessed a surge in the input costs and reported higher cost of sales, and an increase in selling and administrative expenses, however, again form Gain on acquisitions, disposals and others supported the profitability. Operating income stood at CAD 73 million, as compared to CAD 54 million in pcp.

• Net income stood at CAD 46 million, as compared to CAD 58 million in pcp, due to a provision for income tax amounting to CAD 30 million, versus a tax recovery of CAD 7 million in PCP. However, a slightly lower finance expense of CAD 22 million versus CAD 24 million in pcp partially supported the bottom line.

Valuation Methodology (Illustrative): EV to Sales

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

On a YTD basis, the group witnessed strong traction from the specialty products segment under the packaging segment. Operating income before depreciation and amortization stood CAD 53 million in 9MFY21, as compared to CAD 43 million in pcp. This was primarily due to the combination of volume increases, higher average selling price, and a favorable sales mix. We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a double-digit upside (in percentage terms).  For the said purposes, we have considered peers like West Fraser Timber Co Ltd, Clearwater Paper Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of CAS at the current market traded price of CAD 12.89 at 09:38 AM Toronto February 07, 2022.

One-Year Technical Price Chart (as on February 07, 2022). Analysis by Kalkine Group

Technical Analysis Summary:

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

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