Cascades Inc. Unlimited

Upsizes Price Offering for Senior Notes: Cascades Inc. Unlimited (TSX: CAS) is engaged in the production, conversion and marketing of packaging and tissue products, composed mainly of recycled fibres. As on 12 August 2020, the market capitalization of the company stood at ~CAD 1.41 billion. The company has recently announced that it has upsized and priced its private placement of USD 300 million of additional 5.375% Senior Notes due in 2028 and the new notes will be issued at a price of 104.250% of their principal amount along with accrued interest. The company will use these proceeds to fund the purchase of its outstanding principal amount of USD 200 million of 5.75% Senior Notes due 2023 and will redeem its 2023 Notes. It will also repay certain amounts under its revolving credit facility.

Quarterly Performance (For the Period Ended 30 June 2020): The company reported results for the second quarter ended 30 June 2020 wherein it reported sales of CAD 1,285 million, reflecting a decline of 2% on the previous quarter. This was mainly due to lower sales volumes across all segments primarily due to COVID-19. In the same time span, operating income of the company went up by 4% to CAD 94 million and net earnings per share increased to CAD 0.57 per share from CAD 0.24 in the first quarter of 2020. Favorable foreign exchange variance and solid cash flows resulted in a decline in net debt to CAD 2,077 million from CAD 2,212 million. The performance of the company reflects resilience of the business model which is focused on providing customers with sustainable quality packaging and tissue solutions.

Quarterly Financial Highlights (Source: Company Reports)

Key Risks: The company is exposed to a variety of risks including general economic conditions, decreases in demand for the products, increases in raw material costs, fluctuations in selling prices and adverse changes in general industry conditions.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/ Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The company remains optimistic regarding its operational performance in the coming years. It expects that the liquidity levels will meet the company’s evolving future requirements including management of debt level. The company will pay its interim dividend of CAD 0.08 on 3 September 2020, with an ex-date of 19 August 2020. As per TSX, the stock of CAS is trading close to its 52-weeks’ high but retains potential for future growth. The stock of CAS gave a return of 21.85% in the past one year. We have valued the stock using the EV/ Sales multiple based illustrative relative valuation method and have arrived at a target upside of low double-digit (in percentage terms). Considering the current trading levels, decent returns in the past three months, and improvement in financial performance, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 14.89, down by 0.27% on 12 August 2020.

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

CCL Industries Inc.

CCL Industries Signs Agreement to Acquire Graphic West: CCL Industries Inc. (TSX: CCL.B) manufactures and sells packaging and packaging-related products. As on 12 August 2020, the market capitalization of the company stood at ~CAD 8.46 billion. The company has recently signed an agreement to acquire an organization of specialized digital printer of cartons, Graphic West International ApS. The enterprise value of the transaction, net of cash and debt, is ~CAD 36 million.

Quarterly Performance (For the Period Ended 30 June 2020): During the quarter ended 30 June 2020, the company focused on coping with the global pandemic. During the quarter, sales of the company went down by 9.8% to CAD 1,221.9 million and operating income witnessed a decrease of 18.2% and stood at CAD 163.6 million. In the same time span, net earnings of the company were CAD 103.9 million and basic earnings per class B share were CAD 0.58. During the second quarter, the company completed the bond offering and raised USD 600 million at 3.05%, due in June 2030. The company expects to use these proceeds to pay down the remaining borrowings on its syndicated revolving credit facility. In the same time span, the company saw improvement in liquidity and reported a cash balance of CAD 619.4 million and a net leverage ratio of under 1.8 times of adjusted EBITDA.

Quarterly Financial Performance (Source: Company Reports)

Key Risks: The company is exposed to a variety of key risks including the adverse impact of the COVID-19 pandemic, the impact of competition; consumer confidence and spending preferences; general economic and geopolitical conditions; currency exchange rates; interest rates and credit availability.

Valuation Methodology: Price/Cash Flow Multiple Based Relative Valuation (Illustrative)

Price/Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: During the quarter, the company reported an operating margin of 13.4%. The company is focused on retaining supply chains and respond to customer demand. The company will pay its interim dividend of CAD 0.18 on 30 September 2020, with an ex-date of 15 September 2020. As per TSX, the stock of CCL.B is inclined towards its 52-weeks’ high but retains a potential for further growth. The stock of CCL.B gave a return of 15.54% in the past three months and a return of 13.78% in the last one month. We have valued the stock using the price to cash flow multiple based illustrative relative valuation method and have arrived at a target upside of low double-digit (in percentage terms). Considering the current trading levels, decent returns in the past three months, resilience in performance despite the softer market conditions, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 50.7, down by 0.51% on 12 August 2020.

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

Disclaimer

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