CCL Industries Inc.

CCL Industries Inc. (TSX: CCL.B) manufactures and sell packaging and packaging-related products. The company operates through four segments, namely CCL, Avery, Checkpoint and Innovia. CCL segment which sell pressure sensitive and extruded film materials used for labels on consumer packaging, healthcare, etc., derives the majority of the revenue for the company. The company offers innovative packaging services and operates across major geographies like Europe, North America, and Asia etc.

Major Highlights:

• On July 02, 2020, the group informed the acquisition of InTouch Label and Packaging Co., Inc., a specialized short-run digital label converter company. The transaction is valued at CAD 10.9 million, net of cash and debt.
• The company raised USD 600 million unsecured notes with an interest rate of 3.050%. These notes will be maturing in 2030. With the available funds, the company would repay its existing debt owed under the revolving credit facility, and rest would be utilized for general corporate purposes. 

Q1FY20 Income Statement Highlight: CCL Industries Inc. posted its quarterly results, wherein the company reported sales of CAD 1,296.5 million down 2.7% on y-o-y. The decline in the sales was due to lower organic growth and a negative FX impact, partially offset by acquisition-related growth.  Plant closure during February across China took a toll on the overall profitability. Gross profit declined to CAD 370.7 million from CAD 386.1 million in Q1FY19, primarily due to lower revenue. Selling, general and administrative expenses improved to CAD 180.9 million from CAD 195.6 million reported a year ago due to a decline in the corporate costs. Earnings before income tax stood marginally higher at CAD 172.2 million as compared to CAD 168.2 million in the previous corresponding period, thanks to a significantly lower finance cost. The company reported net earnings for the period at CAD 126.6 million against CAD 123.6 million in the previous corresponding quarter. 

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group derives a portion of its revenue from the automotive sector. A prolonged slowdown in the automotive sector would impact the group’s performance.

Valuation Methodology: Price to Cash Flow Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock corrected ~22% so far this year due to weak investor’s sentiment on account of COVID-19 pandemic. The Company has a diversified client base and caters to several global corporations, government institutions, small businesses and consumers, which ensures stable income. To weather the current challenging environment, the Company has reduced its capital spending by ~30% to CAD 250 million in order to preserve the liquidity for its near-term working capital needs. The Company witnessed improved demand from Healthcare & Specialty, Home & Personal Care segments, and we believe, the momentum to continue in the coming quarters. The demand is likely to grow from other segments as the governments across geographies where the group operates are easing the lockdown restrictions and opening the businesses in a phased manner. The group is likely to benefit from the opening of non-essential retail stores and apparel manufacturing facilities. We have valued the stock using Price to Cash flow based relative valuation approach and considered peers like Winpak Ltd, Silgan Holdings Inc and Greif Inc, etc., and arrived at a target price offering lower double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 43.13 on July 3, 2020.

CCL.b Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Intertape Polymer Group Inc.

Intertape Polymer Group Inc. (TSX: ITP) is engaged in the development, production and sale of a range of paper and film based pressure-sensitive and water-activated tapes, protective packaging, polyethene and specialized polyolefin films, engineered coated products and packaging machinery used for industrial and retail use.

As the economy is preparing for reopening, the group has launched a new product Social Distancing Tape, an essential product in the challenging time.  The product has been launched in two variants for indoor and outdoor purposes. The product is intended to mark 6 feet distance points for directing foot traffic and facilitating safe line formation.

Guidance: The group expects its revenue within the range of USD 235 to USD 250 million for Q2FY20, while adjusted EBITDA for the period is anticipated in between USD 29 million to USD 34 million.

Q1FY20 Financial Highlights: For the period ended March 31, 2020, ITP posted a revenue of USD 278.87 million, up marginally by 0.4% over Q1FY19. The improvement was driven by volume and product mix improvement and additional revenue from the Nortech Acquisition, partially offset by a lower selling price. The Company reported an increase in operating profit to USD 24.08 million, against USD 21.64 million in the previous corresponding period (pcp), supported by a lower cost of sales and selling, general & administrative expenses. The Company reported net earnings of USD 14.17 million, higher from USD 10.53 million in the previous corresponding quarter. The Company ended the quarter with a cash balance of USD 19.43 million, while total assets stood at USD 1,085.06 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: Though the group’s facilities are operational, any restrictions measure announced by the governments may result in supply chain disruption and lower demand from non-essential segments. Any such scenario would impact the group’s performance.

Valuation Methodology: Price to Earnings Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of ITP corrected ~29% so far this year amid the free fall in the global equity market. The Company’s business is categorized as ‘essential’ and is immune to the economic cycle. Amidst a temporary jolt in demand, the Company successfully reported a stable top-line along with a growth in the profitability, which is a key positive. The group has been benefitted from the boom in e-commerce and aided by higher demand from food & beverage segment. The group notified that it would operate at a lower capacity aligned with the market demand and to manage its working capital and associated cost levels in an efficient manner. The Company has ample liquidity to weather the current pandemic while the Management expects improved operational efficiency from its recent acquisitions which has enhanced the low-cost manufacturing base, this augurs well for margin improvement. The stock made a pull-back rally and gained ~24% in the last three months, outperforming the sector by ~16%. Further, at the last traded price, the stock is offering a dividend yield of ~6.82%, which is lucrative considering the current interest rate environment and likely to appeal income investors. We have valued the stock using Price/Earnings based relative valuation approach and considered industry (Containers and Packaging) median on NTM basis and arrived at a target price offering double-digit upside potential (in % terms). Hence, considering the aforementioned facts and risk involved, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 11.73 on July 03, 2020.

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

Disclaimer

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