CCL Industries Inc.

CCL Industries Inc. (TSX: CCL.B) manufactures and sells packaging and packaging-related products like pressure sensitive and extruded film materials, used for labels on consumer packaging, healthcare, automotive, and consumer durable products. 

Key Updates:

• Improved Financial Flexibility: The group successfully lowered its total debt to CAD 2,094.6 million in FY20, as compared to CAD 2,419.8 million in FY19. At the same time, net debt stood at CAD 1,390.9 million v/s CAD 1,716.2 million a year ago. A decline in total debt implies lower finance costs which is favorable for the margins, and also enhances the company’s financial flexibility. Free cash flow from operations stood higher at CAD 616 million in FY20 v/s CAD 444 million in FY19.                           

Cash Flow and Debt Summary Highlights (Source: Company Presentation)      

• Higher Margins than Industry: The group reported an EBITDA margin in the recent few years, which stood within 21.4% for FY20, higher than the industry median of 16.5%. Operating margin and net margin stood at 14.5% and 10.1%, respectively compared to the  industry median of of 10.7% and 4.8%, respectively. 

FY20 Financial Highlights:

• The group announced its full-year result, wherein the company posted sales of CAD 5,242.3 million, slightly lower than CAD 5,321.3 million in FY19.
• Operating income grew 4.3% on y-o-y basis to CAD 823.5 million, while net earnings were recorded at CAD 529.7 million, up 10.7% over FY19.
• The quarter was marked by lower selling, general and administrative expenses (CAD 725.4 million v/s CAD 774.6 million in FY19) coupled with a significantly lower finance cost (CAD 67.9 million v/s CAD 86.7 million in FY19).
• The company reported its EBITDA of CAD 1,123.2 million, as compared to CAD 1,067.2 million in FY19, supported by a strong performance from the CCL segment due to organic growth coupled with positive effects from acquisitions. Innovia segment reported an improved performance due to higher revenue, improved revenue mix, cost savings, productivity & asset utilization. However, the positives were partially offset by a slide in EBITDA from Avery and Checkpoint segments.
• The group reported cash and cash equivalents of CAD 703.7 million, while total assets were recorded at CAD 7,336.7 million.

FY20 Income Statement Highlights (Source: Company Report)

Risks: The group derives its revenue from diversified geographies, and hence the group is exposed to FX risk. Moreover, the management guided that in FY21 Innovia segment might be impacted due to higher resin prices.

Valuation Methodology (Illustrative): Price to Earnings based

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

Stock Recommendation:

The group reported a higher dividend payment of CAD 128.7 million v/s CAD 121.1 million in FY19, despite the challenging operating environment, backed by improved cash flows (CAD 882.9 million in FY20 v/s CAD 779.5 million in FY19). The company would focus on investment opportunities to expand its business and would make capacity additions to improve its competitiveness. The company derives its major revenue from the CCL segment, which is expected to report decent growth in FY21, while the Checkpoint segment might return to the prior-year levels, which indicates normalcy in the operations. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Winpak Ltd, Aptargroup Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 67.65 on March 23, 2021.

One-Year Price Chart (as on March 23, 2021). Source: Refinitiv (Thomson Reuters)

Ritchie Bros. Auctioneers

Ritchie Bros. Auctioneers (TSX: RBA) operates the world's leading marketplace for heavy equipment. The company is a live auctioneer of industrial equipment and expanded its operations across construction, agricultural, oilfield, and transportation equipment in a variety of venues.

Key Updates:

• Robust Margins v/s Industry: The group reported a strong operational efficiency in the recent past, which resulted to higher Gross margin and EBITDA margin, which stood above 53% and 25%, respectively during Q2FY20 to Q4FY20, higher than the industry median of 38.7% and 16.1%, respectively. Operating margin stood within 19% to 23% during Q2FY20 to Q4FY20, as compared to the industry median of 7.8%. Net margins remain elevated with in the range of 13% to 15% during Q2FY20 to Q4FY20, as compared to the industry median of 4.8%.

• Strong traction from the Equipment segment: In March 9 to March 11, 2021 online event, the group sold 4,300 equipment items and trucks in Toronto. Also, during the same auction event Company gains 35% more bidders year over year and achieved CAD 49+ million (US$39+ million) in gross transaction value. Outcome of this auction is encouraging, considering the current economic situation. Most of the traction came from the transportation equipment, with Class 8, dump trucks, and heavy haul trucks segments. Notably, total registered Bidders stood more than 10,000, while the total Number of Consignors was at more than 700.

FY20 Financial Highlights:

• RBA announced its full-year result, wherein the company posted total revenue of USD 1,377.260 million, up 4% from FY19. The period was marked by a 5% y-o-y increase in Service revenue, while fees revenue grew 12% on y-o-y.
• Total operating expenses stood at USD 1,114.100 million, higher than USD 1,095.439 million in the previous financial year, due to higher selling, general and administrative expenses (USD 417.523 million v/s USD 382.389 million in FY19), partially offset by a 5% y-o-y decline in both costs of services and cost of inventory sold, amounting USD 157.296 million and USD 458.293 million, respectively.
• Net income stood higher at USD 170.095 million, reflecting an increase of 14% over FY19.
• Cash and cash equivalents stood at USD 278.766 million, while total assets were recorded at USD 2,351.529 million.

FY20 Income Statement Highlights (Source: Company Report)

Risks: Slide in GTV due to lower traction from the heavy goods and construction segments on account of an economic slowdown might hinder the overall performance of the company.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock Recommendation:

Despite a tepid macro scenario, the group sold 18% more truck tractors in FY20 v/s FY19, and median quarterly pricing was up in Q2FY20 till Q4FY20, with no signs of a demand slowdown. Moreover, the group witnessed improved traction from residential real estate construction during FY20, as remote workers looked to move away from city centers, while strong product pricing persisted across the earthmoving equipment, including multi-terrain loaders, and reported higher volume and better pricing than the previous financial year. Moreover, the company saw the same momentum during the first quarter of FY21, which is a key positive. The group reported its available credit facilities of USD 638 million, of which USD 455 million is unused as on FY20, while the group does not have any debt maturities till October 2023. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Stantec Inc, Aggreko PLC etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 70.98 on March 23, 2021.

One-Year Price Chart (as on March 23, 2021). Source: Refinitiv (Thomson Reuters)

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