CCL Industries Inc.

CCL Industries Inc. (TSX: CCL.B) manufactures and sells packaging and packaging-related products like pressure sensitive and extruded film materials, used for labels on consumer packaging, healthcare, automotive, and consumer durable products. 

Key Highlights:

• Industry beating profitability margins: The company reported strong profitability margins, wherein EBITDA and operating margins were recorded at 21.5% and 15.6%, respectively higher than the industry median of 15.9% and 10.1%, respectively. Net margin stood at 10.9% in Q2FY21, higher than the industry median of 5.8%.
• Healthy Balance sheet: The company reported a lower net debt of CAD 1,262.3 million in Q2FY21, as compared to CAD 1,390.9 million in Q4FY20. The above was supported by a decline in total debt of CAD 1,955.6 million in Q2FY21, as compared to CAD 2,094.6 million in Q4FY21. Notably, net debt to Adjusted EBITDA improved to 1.05x at the end of Q2FY21, as compared to 1.24x in Q4FY20.
• Strong results from Checkpoint operation: The company reported solid traction from its checkpoint segment and reported sales of CAD 356.4 million in H1FY21, which jumped from CAD 276.5 million in pcp. Checkpoint manufactures technology-driven loss-prevention, inventory-management and labelling solutions, which includes radio frequency and radio frequency identification (RFID) solutions, targeted primarily to the retail and apparel industry. Notably, operating profit soared to CAD 54.5 million in H1FY21, as compared to CAD 18.5 million in pcp.

Q2FY21 Financial Highlights

• The group announced its quarterly results, wherein the company posted sales of CAD 1,406.3 million, higher than CAD 1,221.9 million in pcp. The increase was driven by higher income from CCL and Checkpoint segments.
• Gross profit stood at CAD 410.3 million, jumped from CAD 327.5 million in pcp, supported by higher revenues, partially offset by higher cost of sales.
• The company reported higher selling, general and administrative expenses while reported lower expense from restructuring and other items. On the other hand, finance costs also stood lower than the previous corresponding period.
• Net earnings for the period jumped to CAD 153.0 million from CAD 103.9 million in pcp.

Q2FY21 Income Statement Highlight (Source: Company Report)

Risks: The group derives its revenue from different geographies; hence, FX volatility is likely to impact the company’s operations.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The company reported strong short-term liquidity, wherein quick ratio and current ratio were recorded at 1.28x and 1.70x, respectively, higher than the industry median of 1.06x and 1.57x, respectively. Moreover, cash cycle days in Q2FY21 stood at 14.5 days, significantly lower than the industry median of 45.2 days. A lower cash cycle day indicates a better liquidity position. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Winpak Ltd, Avery Dennison Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 66.32 on September 28, 2021.

One-Year Technical Price Chart (as on September 28, 2021). Source: REFINITIV, Analysis by Kalkine Group

Canadian Tire Corporation

Canadian Tire Corporation (TSX: CTC.A) sells home goods, sporting equipment, apparel, footwear, automotive parts and accessories, and vehicle fuel through more than 1,750-store network of the company, dealer, and franchise-operated locations across Canada. Apart from the namesake banner, stores operate primarily under the Mark's, SportChek, Party City, Atmosphere, and PartSource monikers. 

Key Highlights:

• Industry Leading margins: The company reported better margins than its peers, which indicates better operational efficiencies. EBITDA margin and operating margin stood at 15% and 10.6%, respectively, which were higher than the industry median of 12.5% and 10%, respectively. Moreover, the company reported its net margin at 6.6% in Q2FY21, higher than the industry median of 5.9%.

• Strong retail sales supported the company’s performance: The corporation witnessed consecutive growth in the retail segment during the recent quarters, which has fueled the company’s top-line and bottom-line. Notably, revenue stood at CAD 7,241.4 million in H1FY21, reflecting a growth of 20.5% on y-o-y basis, while net income was reported at CAD 445.5 million in H1FY21 significantly higher than CAD 14.5 million in pcp.

• eCommerce segment to support future sales: Due to the change in consumer preferences, the company witnessed a tremendous surge in eCommerce sales in Q2FY21, which stood at CAD 856.7 million, surging 34% on a y-o-y basis. The major growth was supported by the Canadian Tire banner, which grew 63.2% on y-o-y basis. Notably, eCommerce sales stood at CAD 2.1 billion in the last 12 months. We expect the above momentum to continue in the coming days, which would further enhance the sales volumes of the group.

Q2FY21 Financial Highlights:

• The group announced its second quarter result, wherein the group posted revenue of CAD 3,918.5 million, up 23.9% on y-o-y basis, supported by strong revenue growth within the Retail segment, partially offset by lower income from the Financial Service segment.
• Gross profit was recorded at CAD 1,345.0 million, jumped 43% y-o-y basis, primarily supported by elevated revenue, partially offset by higher cost of producing revenue.
• Income before income taxes soared CAD 357.5 million, from CAD 8.3 million in the previous corresponding period (pcp). The growth was supported by higher gross profit coupled with lower net finance costs, partially offset by higher selling, general and administrative expenses.
• The company reported its net income of CAD 259.1 million, surged from CAD 2.3 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: Further restriction by the government would result in a lower retail demand, which might hinder the company’s topline and cash flows.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company reported strong performance in the recent past, supported by revenue growth across all banners led by shipment growth. The company witnessed a sold traction in eCommerce segment, and we expect the momentum to continue in the coming days. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Empire Company Ltd, Metro Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 186.32 on September 28, 2021.

One-Year Technical Price Chart (as on September 28, 2021). Source: Analysis by Kalkine Group

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

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