Winpak Ltd

Winpak Ltd (TSX: WPK) manufactures and sells a variety of packaging materials and related packaging machines.

Key Highlights:

• Industry Leading Margin Profile: The company has industry leading margin profile, with Gross Profit margin of 30.9% in FY20 vs industry median of 25.6%, EBITDA margin of 22.8% against the industry median of 16.2% and Net Margin of 12.8% as compared to 4.7% industry median. More importantly, the company has consistently generated EBITDA margin above 20% over the past five years and net margin above 10% in the same period, reflects a strong competitive advantage of the company within the industry.

• Strong Liquidity Position: The company has solid liquidity position, with current Ratio at the end of FY20 stood at 11.49x, implies sufficient liquidity to easily cover all its short-term expenses and obligation. From the relative analysis standpoint, the company’s current ratio of 11.49x is significantly higher against the industry median of 1.38x.

• Negligible Balance Sheet Risk: The company has virtually zero debt in its balance sheet, with total debt/equity ratio of 0.01x at the end of FY20 vs industry median of 1.36x. This implies negligible balance sheet risk.

• Improved Performance on Sequential Basis: The company’s top-line and bottom-line in the fourth quarter of FY20 has improved on a sequential quarter basis, with revenue stood at US$ 212.09 million, against USD 210.6 million reported at the end of the Q3FY20, led by volume advancement in the Q4FY20. Net Income also improved to US$ 28.077 million against US$ 27.372 million reported at the end of Q3FY20.

Financial Highlights: Q4FY20 (All figures in US $)

Source: Company Filing

• Revenue in the fourth quarter of 2020 was $212.1 million, representing a decrease of $5.4 million or 2.5% from the fourth quarter of 2019. 
• However, volumes advanced by 1.4% in the fourth quarter when compared to the same period in 2019. The flexible packaging operating segment realized volume growth of 4%.
• Gross profit margins advanced to 30.8% of revenue in the fourth quarter of 2020 from the 30.4% recorded in the same quarter of 2019.  
• The raw material purchase price index increased by 4.9% from the third quarter of 2020.  During the fourth quarter, polypropylene resin costs climbed by 19% while polyethylene resin costs rose by 9%. However, in comparison to 2019, the cost dropped by 7.9% due to lower costs for polypropylene and polystyrene resins.
• The Company's cash and cash equivalents balance stood at $495.3 million, an increase of $9.4 million from the end of the third quarter.  Winpak continued to generate strong and consistent cash flows from operating activities.

Risk Associate to Investment: The company is exposed to a variety of risk ranging from fluctuation in raw material prices, forex risks and lower demand offtake for the company’s product.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock Recommendation: Despite challenged witnessed in 2020, the Company was able to successfully navigate and overcome the unforeseen challenges that emerged during the year.  Winpak is classified as an essential supplier of packaging materials and machinery for the customers in the food, beverage and healthcare industries.  Entering 2021, the Company, along with businesses around the world, continues to pay very close attention to the ongoing developments arising from the pandemic. The packaging machinery segment set a record in 2020 with the number of machines sold, and this momentum has continued into 2021 with a vibrant order backlog.  Throughout 2020 and thus far in 2021, the raw material procurement chain has been dependable with nominal interruptions, enabling all facilities to operate effectively.  Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 39.68 on March 05, 2021. We have considered CCL Industries, Aptargroup Inc and Sonoco Products etc., as a peer group for the comparison.

1-Year Price Chart (as on March 05, 2021). Source: Refinitiv (Thomson Reuters)

Kelso Technologies Inc.

Kelso Technologies Inc. (TSX: KLS), is a railway equipment supplier that produces and sells tank car service equipment used for the safe loading, unloading and containment of hazardous materials during transport. 

Key highlights 

• Product diversification:The company is a diverse product engineering company specialising in the development, production and distribution of proprietary equipment used in transportation applications. While its roots are in rail tank car equipment, new growth markets fit well with its business capabilities, and slowly the company is increasing that pie.

Source: Company 

• Development plans for “KXI”:The company’s KXI is now in the final commercial design stages and moving toward revenue generation. The initial development plans for KXI would be distributed to the development partners in Canada that operate in environmentally sensitive terrain before moving into the USA and other world markets. These potential markets are multi-million-dollar revenue opportunities for Kelso and part of an overall automotive aftermarket conversion industry valued by analysts at approximately USD 44 billion annually. 

• Healthy working capital: The Company’s working capital remained at a healthy level of USD 7.94 million on September 30, 2020. There is no long-term interest-bearing debt, and the company can currently operate without the need for new equity capital or credit facilities. This implies negligible balance sheet risk. 

Financial overview of Q3 2020 (In USD)

Source: Company 

• In Q3 2020, the company reported revenue of USD 1.59 million, compared to USD 5.60 million in the previous corresponding period. The decline in revenue was impacted by the unfavourable circumstances surrounding the COVID-19 pandemic.
• Gross profit stood at USD 600,754 (38% of revenues) in Q3 2020, compared to USD 2.58 million (46% of revenues) in the previous corresponding period.
• On the back of lower revenues, coupled with higher office & administration cost and foreign exchange losses, the company posted a net loss of USD 681,527 against a profit of USD 759,713 in the previous corresponding period. 

Risks associated with investment

The company is prone to many risks associated with its business's nature, which could hamper its performance. Some of these risks include a fall in demand from automobile manufacturers, disruptions from the supply chain, technological change, increased prices of raw materials and commodities, etc.

Stock recommendation

COVID-19 has been a decisive economic setback in 2020 that is reshaping the current business dynamics affecting the rail tank car industry. The company's financial performance for the first nine months of 2020 was conducted at profitable levels but with a 36% decline in sales activity over 2019. However, the company's diversified products are opening new growth avenues that fit well with its business capabilities. The company’s "KXI" is now in the final commercial design stages and moving toward revenue generation, a key positive for the company. On the valuation front, the stock is available at forward EV/Sales multiple at 1.06x against the peers mean of 1.85x. Hence, considering the aforesaid rationale, we recommend a “Speculative Buy” rating in the stock at the closing price of CAD 1.10 on March 5, 2021. We have considered dynaCERT Inc, Westport Fuel Systems Inc, etc. as the peer group for the comparison.

1-Year Price Chart (as on March 5, 2021). 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.