Cascades Inc.

Growing Consumer demand to Thrive Business Prospects: Cascades Inc. (TSX: CAS) is a paper and packaging company which manufactures, transforms, and sells packaging and tissue products primarily made from recycled fibers.

The Board of Directors of Cascades declared a quarterly dividend of CAD 0.08 per share, payable on June 4, 2020.

Outlook: CAS expect, a surge in consumer packaging demand that would lead to specialty product growth while industrial growth is expected to remain soft in coming quarters. Within the Boxboard Europe segment, the Group expects a decent growth aided by higher industry demand and favorable price realizations. The expectation of easing trend in pantry stocking which were seen in the first quarter and lower demand levels following the closures of businesses, both Tissue and Containerboard segments are likely to report a slow growth rate in coming quarters.

Q1FY20 Financial Highlights: CAS came up with a solid set of numbers, wherein, the Company posted sales of CAD 1,313 million, depicting a 7% growth over Q1FY19. The increase was driven by a strong momentum from tissue paper segment followed by decent growth from other segments, while a lower performance from specialty products remained a drag. The top-line was further supported by higher average selling price in the Tissue segment coupled with favorable sales mix and positive foreign exchange impact. Operating income stood higher at CAD 90 million, as compared to CAD 72 million in the previous corresponding period. Net earnings stood at CAD 33 million, unchanged from Q1FY19, primarily due to higher finance expense, FX loss and higher provisioning for income taxes. The Company exited the quarter with cash and cash equivalent of CAD 153 million and total Assets of CAD 5,477 million.

Q1FY20 Income Statement Highlight (Source: Company Reports)

Valuation Methodology:  Price/Earnings based Relative Valuation

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of CAS stood resilient and gained ~756 in the last one year, amidst a massive correction across the market. The Company provides paper and packaging services to the industries and retail consumers. Notably, the stock is quoting above its 200 days simple moving average (SMA) of CAD 12.05, which indicates the priority of choosing ‘defensive businesses’ during economic downturn and the stock fits the criteria perfectly. To weather the current pandemic, the Company lowered its FY20 capital expenditure guidance and expect it to be in the range of CAD 175 million to CAD 200 million from CAD 250 million. We have valued the stock using Price/Earnings based relative valuation metrics and considered industry (Containers & Packaging) average multiple. We have arrived at a target price of lower double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 13.89 per share, as on May 07, 2020.

CAS One-Year Daily Price Chart (Source: Thomson Reuters)

Cenovus Energy Inc.

Expected Demand Recovery and Liquidity Preservation Lead to Improved Prospects:  Cenovus Energy Inc. (TSX: CVE) is a Canada-based integrated energy company, engaged in producing, developing and marketing oil, natural gas and natural gas liquids.

Due to the ongoing COVID 19 crisis, the Company confirmed a temporary suspension of its crude-by-rail program and revised its FY20 production guidance. To weather the current pandemic, the Company took some prudent measures like CAD 600 million reduction in planned capital expenditure, CAD 50 million reduction in its general and administrative expense and a temporary suspension in dividend followed by a deferral of investment decisions on major growth projects.

Outlook: CVE expects its production of Oil Sands within the range between 350,000 and 400,000 barrels per day for the rest of FY20. The Company estimates its capital investment in between CAD 750 million and CAD 850 million, primarily designated to sustaining oil sands production and refining operations.

Q1FY20 Financial Highlights: For the period ended, March 31, 2020, Cenovus reported a weak set of numbers and reported revenues of CAD 3,968 million, significantly lower than CAD 5,004 million in the pcp. The performance was dampened due to significantly lower average crude oil sales price of CAD 22.74 per barrel compared with CAD 49.84 per barrel in the first quarter of FY19. The global oil prices fell due to a slump in global demand for crude oil and refined products on account of COVID-19 followed by an intensified dispute between Saudi Arabia and Russia, resulted in over-supply situation. However, the Company managed to post an improved Production of 482,594 BOE/ day, reflecting an 8% growth over the previous corresponding quarter. The Company reported a net loss of CAD 1,797 million, as compared to a profit of CAD 0.110 million in the previous corresponding quarter. The turbulence in bottom-line was majorly attributed to a significant rise in inventory write-downs, a higher depreciation, depletion & amortization expense and an increase in transportation and blending costs, partially supported by the decline in purchased product expense, a lower finance income and an income tax recovery.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology:  EV/EBITDA based Relative Valuation

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The Stock CVE corrected ~55% in the last one year on account of weak demand for crude oil across worldwide due to ongoing COVID 19 crisis. The temporary halt in production, minimum industrial activities and over-supply of crude oil contributed the major jolt in the commodity price. However, we have seen a recent pullback in crude oil prices which have led to temporary relief to the stock causing a ~38% price improvement in the last one month. The stock has closed above its 20-days and 50-days simple moving average (SMA) of CAD 4.3 and CAD 4.48, respectively. We expect a gradual recovery of economy which would support the commodity price in coming days. Further, to strengthen its liquidity position, CVE secured an additional CAD 1.1 billion committed credit facility, in addition to existing CAD 4.5 billion of committed credit facility, which is sufficient to cater the current downturn. We have valued the stock using EV/EBITDA based relative valuation approach and taken peers like Imperial Oil Ltd (TSX: IMO), MEG Energy Corp (TSX: MEG), Inter Pipeline Ltd (NYSE: IPL)  etc. and arrived at a target price offering a lower double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 5.35 as on May 7, 2020.

CVE One-Year Daily Price Chart (Source: Thomson Reuters)

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