Cascades Inc

Cascades Inc (TSX: CAS), along with its subsidiaries, produces, convert and market packaging and tissue products composed mainly of recycled fibres. The company is organized into four main business segments: Containerboard, Boxboard Europe, Specialty Products (which constitutes packaging products) and Tissue Papers. Business activity of the company is functioned through Canada, United States, Italy, and other countries. Its customer base includes food processing companies, maintenance industry, accommodations, and housing industry, micro-businesses, and boutiques.

Key Highlights

• Decreasing raw material cost: The company has benefitted from lower raw material prices over the years, which has supported the margins. Although the company witnessed slight uptrend in the raw material cost in Q4 2020, which was offset through the strong demand, combined with recent industry price increases.

Source: Company

• Healthy financial matrix: The company continuously showed a spirited performance in operating income and net earnings. On a sequential basis, the company registered a growth of 49% each in operating income and net income, respectively.

Source: Company

• A consistent generator of free cash flow: The company is consistently generating free cash flows. In Q4 2020, they clocked CAD 85 million of adjusted free cash flow, which increased by 93%, against CAD 44 million in Q3 2020.

Source: Company

• Declining Net debt/Adjusted OIBD:The company reported a decline in net debt to CAD 1,679 million on December 31, 2020, compared with CAD 1,982 million as at September 30, 2020, driven by stable cash flow from operations. Furthermore, the group improved its Net debt to adjusted OIBD ratio to 2.5x in FY2020, against 3.25x in FY2019. 

Source: Company 

Financial overview of Q4 2020

Source: Company

• In Q4 2020, the company reported sales of CAD 1,284 million, grew by CAD 57 million, or 5%, compared with the previous corresponding period. Stronger volumes drove the higher sales in all packaging segments, most notably in the Containerboard segment, which benefited from strong demand on both the manufacturing and converting side.
• On the back of lower operating expenses, which stood at CAD 1,175 million, against CAD 1,228 million in Q4 2019, the company posted a healthy operating income of CAD 1,175 million, against a loss of CAD 1 million in pcp.
• The company reported net earnings attributable to shareholders at CAD 73 million in the reported quarter, against a loss of CAD 26 million in pcp.

Risks associated with investment

Many factors play a pivotal role in the Company’s business, like general economic conditions, decreases in demand, the prices and availability of raw materials, fluctuations in selling prices, etc. Any ups and downs in these factors can play a vital role in the Company's operations and financials.

Valuation Methodology (Illustrative): EV to Sales

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company’s near-term outlook is positive despite ongoing COVID-19 related uncertainty as the demand levels in containerboard remain strong, which, combined with recent industry price increases, are expected to offset the raw material pricing headwinds. Furthermore, the ongoing modernization, cost management, and margin improvement initiatives would help the company partially counter the softer demand factors. Also, the company is declining its net debts and generating consistent free cash flows are the key positives. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing price of CAD 17.58 on March 1, 2021. We have considered Domtar Corp, Canfor Corp, Interfor Corp, West Fraser Timber Co Ltd etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Park Lawn Corporation

Park Lawn Corporation (TSX: PLC), provides goods and services associated with the disposition and memorialization of human remains. The Company's products and services are sold on a pre-planned basis (pre-need) or at the time of a death (at-need). The Company and its subsidiaries own and operate businesses, including cemeteries, crematoria, funeral homes, chapels, and a transfer service. 

Key highlights

• The bullish stance of management: The group is optimistic about its operations, and the management expects healthy growth in Adjusted EBITDA over fiscal 2022. The company targets CAD 100 million of Adjusted EBITDA and margin of 26%.

Source: Company 

• Favourable Age Demographics would help in generating decent revenue: The company is uniquely positioned to take advantage of favourable population demographics, driven by the aging of the population born between 1946 and 1964. The rise in ageing population would provide many opportunities for the company’s funeral homes and cemeteries for preneed sales and planning.

Source: Company

• Rising Cremation Rates: Since 2016, the number of families in North America choosing cremation has outnumbered those choosing traditional burial, primarily due to the growth of the nuclear family along with the decline of cultural traditions. The group is operating in markets with high cremation rates (Toronto, New York, New Jersey, Colorado, and New Mexico), as well as low cremation rates (Mississippi, Kentucky, North and South Carolina).

Source: Company 

Financial overview of Q3 2020 (Amount in CAD)

Source: Company 

• In Q3 2020, the company’s sales increased by 32% to CAD 79.5 million, as against CAD 60.2 million in Q3 2019. The increase in sales was primarily driven by growth in funeral and cemetery business along with the successful integration of completed acquisitions.
• Gross profit stood at CAD 67.7 million in Q3 2020, as against CAD 54 million in Q3 2019, based on high revenue generated in the reported quarter.
• Net earnings in Q3 2020, increased by 238% to CAD 5.4 million, as against CAD 1.6 million in the previous corresponding period. 

Risks associated with investment

Any change in regulations and government policies, liquidity, and interest rate could affect the company's operations and overall business. Moreover, the outbreak of the Covid-19 pandemic resulted in disruption in the world economy also impacted negatively on the financial and operational performance. 

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

The company is improving its financial performance continuously. It clocked a CAGR of 50.5% in revenues during FY16-TTMQ 3 2020 and a CAGR of 60.5% in Adjusted net earnings for the same period. The revenue from the core business improved along with the benefits from the successful integration of acquisitions made by the group in the past. The group is also looking for new opportunities in the form of acquisitions. Furthermore, the management is confident in their business model and they expect to garner an Adjusted EBITDA of CAD 100 million in FY2022. Therefore, based on the above rationales and valuation, we recommend a “Hold” rating at the closing price of CAD 30.41. We have considered K-Bro Linen Inc, Savaria Corp, GDI Integrated Facility Services Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.