Beacon Securities analyst Ahmad Shaath kept a “Buy” rating on Supremex (Supremex Stock Quote, Charts, News, Analysts, Financials TSX:SXP) in a Thursday report to clients. Shaath said the company’s latest quarter was a miss but business prospects look better for the second half of the year.
Supremex is a manufacturer and marketer of envelopes and a paper-based packaging solutions provider with 11 manufacturing facilities in Canada and six in the US. The company announced its second quarter financials on Thursday, reporting revenue up 15 per cent to $71.7 million and adjusted EBITDA of $9.6 million compared to $13.9 million a year earlier.
The company said its Envelope segment added $49.3 million in revenue, up seven per cent year-over-year, and its Packaging and Specialty Products segment brought in $22.4 million, up 35 per cent.
The Montreal-based company said the quarterly results were impacted by inventory adjustments by some customers and lower demand from sectors more affected by inflation and interest rate levels.
“The first half of 2023 was a very busy period, especially for our Packaging operations, as we consolidated a significant portion of our folding carton activities under one roof in Lachine while also integrating two acquisitions,” said President and CEO Stewart Emerson in a statement.
“Our Envelope business continued to generate a solid free cash flow which allowed us to fund our expansion and reduce debt by $3.1 million this past quarter,” he said.
Shaath said the $71.7 million topline was “well below” his estimate at $78.5 million and the consensus at $79.4 million, as was adjusted EBITDA at $9.5 compared to Shaath’s estimate at $13.8 million and the consensus at $14.0 million. Adjusted EPS at $0.09 per share compared to Shaath’s call at $0.20 and the consensus at $0.21.
Shaath said the Envelope segment margins were looking good, even as organic growth in the area was about negative 12.5 per cent. The Canadian market was a bright spot over the quarter, he said, with revenue flat year-over-year, while Packaging continues to disappoint.
At the same time, there are signs of improvements for the second half, Shaath said.
“The company will need to deliver better performance in Packaging for investors to look beyond SXP’s exposure to a market in a secular decline and reward it with a higher multiple. Thus, we are reducing our valuation multiple to 4.5x (versus 5.0x prior) which, coupled with our lower estimates, yield our new target price of $9.00 (versus $12.00 prior). We maintain our BUY recommendation,” he said.
At press time, Shaath’s $9.00 target represented a projected one-year return of 76 per cent.