Supremex is a Buy, says Beacon

Beacon Securities analyst Ahmad Shaath provided an update to clients on Wednesday on packaging company Supremex Inc (Supremex Stock Quote, Charts, News, Analysts, Financials TSX:SXP), saying the stock trades at a discount to its peer group. Shaath reiterated a “Buy” rating on SXP and $12.00 target price, which at press time represented a projected one-year return of 90 per cent.

Montreal-headquartered Supremex is a manufacturer and marketer of envelopes and has a paper-based packaging solutions business. Beacon recently had a tour with management of the company’s eCommerce hub in Indianapolis, IN, a 57,800 sq ft plant which is less than a half hour away from Indianapolis Intl. Airport, home to the second-largest FedEx Express Hub and about ten miles from Supremex’s Bowers envelope facility.

Shaath said they came away from the tour impressed with the well-organized facility and state-of-the-art equipment, where the company revamped capabilities after its acquisition from Vista Graphic in March 2021. Shaath noted the company’s adding of a third production line and how the plant is currently operating at an annual revenue run rate of over $10 million compared to $6.0 million prior to acquisition, with an even mix between pure-eCommerce products and other products such as beverage boxes. 

“Overall, the facility is capable of satisfying the vast majority of capabilities required by SXP’s customers, with the company outsourcing very minimal types of work that is non-core to it (e.g. laminating corrugate products),” Shaath wrote.

Shaath said discussions with management indicated that the company had a softer second quarter due to weakness in the direct-mail credit card business in the US which will impact SXP’s Envelope segment in the Q2. At the same time, management reported strong orders for July, which indicated that the softer Q2 might have been a trough for that part of the business.

Supremex reported its first quarter in May, where its Q1 generated $88.4 million in revenue, up 40 per cent year-over-year, and adjusted EBITDA of $18.8 million compared to $12.1 million a year earlier.

SXP shares more than doubled between last August and February of this year, but the stock has pulled back a bit since.

Shaath said he likes the look of SXP from here.

“At a current valuation of just 4.2x EBITDA versus packaging peer group’s average of 7.1x, SXP’s shares represent an excellent risk-reward proposition given its strong free cash flow yield which will support shareholder returns across multiple avenues including paying down debt, share buyback, dividend growth and M&A,” he wrote.