Winpak Ltd

Winpak Ltd (TSX: WPK) manufactures and sells a variety of packaging materials and related packaging machines. The packaging materials are used primarily for perishable foods, beverages, and healthcare applications.

Key Updates:

• Debt-free balance sheet with improved financial flexibility: The company has a strong balance sheet and is virtually debt-free. Moreover, despite a sluggish economic scenario, the group reported a higher cash flow from operations at USD 125.165 million, for 9MFY20, higher than USD 119.430 million, a year ago. The company is likely to report lower finance costs in the coming quarters, which would further support the group’s profitability.

• Better than industry margins: The company reported higher gross margin, EBITDA margin, operating margin of 31.3%, 23.2%, 17.9%, respectively in Q3FY20, higher than the industry median of 26.3%, 17%, 11.9%, respectively. Moreover, the group also reported a higher net margin of 13%, as compared to 6.6% of the industry median. Higher margins indicate operational efficiency.

Q3FY20 Financial Highlights:

• WPK declared its quarterly results, wherein the company posted revenue of USD 210.605 million, as compared USD 212.734 million in Q3FY19. The slight decline was primarily attributable to tepid performance from the restaurants and food-service segments due to the restrictions imposed across North America, partially offset by 1% volume growth within flexible packaging segment coupled with higher demand for retail meat and cheese products.
• The group posted a gross profit of USD 66.002 million, as compared to USD 67.115 million in the previous corresponding period (pcp). The marginal decrease was due to a fall in quarterly revenue.
• Income from operations stood at USD 37.792 million, slightly lower than USD 38.197 million in Q3FY19, due to a lower gross profit, and due to an increase in the sales, marketing and distribution expense. However, the decline was partially offset by a lower general and administrative expenses of USD 7.862 million versus USD 8.041 million in pcp.
• WPK reported a net income of USD 27.372 million, lower than USD 29.462 million, a year ago.
• WPK reported cash and cash equivalent of USD 485.986 million, while total assets stood at USD 1,303.640 million.        

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: A major part of the revenue comes from the food-service segment, and any further restriction would result in a slide in the overall volumes.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

The company is an essential supplier of packaging materials and machinery within the food, beverage and healthcare segments. Notably, the flexible packaging segment witnessed improved traction primarily from retailers due to pantry stocking, which is encouraging. Moreover, the company’s plants remain operational even during the restrictions, which indicates operational resilience. The company’s product pipeline remains very active, supported by several new orders, secured from new and existing customers, which is a key positive. WPK would continue to invest across organic growth opportunities, which includes new technologies, processes and material sciences which would eventually enhance the company’s presence within the recycle-ready/reusable products. We have valued the stock using the Price to CF 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 Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 40.23 on January 29, 2021.

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

Domtar Corp.

Domtar Corp. (TSX: UFS) is a leading provider of a wide variety of fibre-based products including communication, specialty and packaging papers, market pulp and absorbent hygiene products. The group is serving more than 50 countries around the world.

Key Highlights

• Making an entry in a new segment: The company plans to enter the linerboard market with its Kingsport paper machine's conversion. Once in full operation, the mill would produce and market approximately 600,000 tons annually of high-quality recycled linerboard, providing them with a strategic footprint in a growing adjacent market.
• Turnaround on the sequential basis: The groupdemonstrated tremendous resiliency and performed very well in the quarter in a challenging operating environment. The group registered growth of 11% in sales, reflecting a positive change in demand outlook. Compared to Q2 2020, manufactured paper shipments were up by 20%, and pulp shipments decreased 7%. The paper's shipment-to-production ratio was 105% in the reported quarter, and paper inventories decreased by 20,000 tons compared to Q2 2020.

• Healthy free cash flows:Despite the challenging operating environment, the company garnered cash flow from operating activities of USD 121 million and capital expenditures were of USD 28 million, resulting in a free cash flow of USD 93 million in Q3 2020. We believe the operations would improve further in the foreseeable future, aided by the gradual recovery in demand for its products. 

• Cost reduction program:The management initiated some cost reduction measures, and they are targeting USD 200 million in annual run-rate savings to be realized by the end of 2021. Under this programme, the group has already registered an Impairment of long-lived assets.

Source: Company 

Financial overview of Q3 2020 (In millions of US dollars)

Source: Company

• In Q3 2020, the company reported sales of USD 1.12 billion, decreased by 12%, against USD 1.28 billion. Net average selling prices for pulp and paper were down in Q3 2020, compared to the previous corresponding period.
• On a sequential basis in Q3 2020, the company registered a growth of 11% in sales, which is a key positive reflecting a positive change in demand outlook.
• The company clocked operating loss of USD 136 million in Q3 2020, against a profit of USD 29 million in the previous corresponding period. The group registered a lower cost of sales. However, the impairment cost and restructuring cost dragged the operating profit.
• Net loss stood at USD 92 million in the reported quarter, against a profit of USD 20 million in pcp. Impairment cost and restructuring cost were the main reasons behind net loss.

Risks associated with investment

The Company is exposed to many risks which could adversely affect the Company’s results of operations and financial conditions. Some of these risks are current economic conditions and uncertain economic forecast, fluctuations in raw material costs, or the unavailability of raw materials, currency exchange rates, interest rates, etc.

Valuation Methodology (illustrative): Price to Cash Flow

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

Stock recommendation

The company plans to enter the linerboard market with the conversion of its Kingsport paper machine. The transformation is expected to be completed by the end of 2022. For the fourth quarter, the management expects a flat paper volume compared on a sequential basis, while pulp markets would continue to gradually improve driven by better demand, maintenance outages and restocking in China. The group is also positive on Personal Care segment to benefit from higher usage, and the impact of new customer wins. Overall raw material costs are expected to remain stable while planned maintenance costs would be lower, which is a crucial positive point. Therefore, based on the above rationale and valuation, we have given a "Buy" rating at the closing price of CAD 38.30 on January 29, 2021. We have considered International Paper Co, Sonoco Products Co, Resolute Forest Products Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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