Description

Investment Thesis

We believe shares Intertape Polymer Group (TSX: ITP) represents a compelling investment due to the quality of the company and cheap valuation.  We, along with many investors, are not finding much value in the current market and do not have a great handle on how/when negative COVID-19 effects will subside.  In the meantime, we are looking for quality companies trading at low multiples on “normalized” earnings. The debate can be centered on when we hit “normal” again, but we tend to look forward at least two years.  Admittedly, this is more art than science and we think it is only applicable to higher quality companies trading at depressed valuations.    

Company Overview:

Intertape Polymer Group is a manufacturer of a variety of packaging-related products.  The breakdown by product revenue is as follows:

Tapes 58%

Films 16%

Woven Fabrics 14%

Protective Packaging 12%

In terms of end markets, the company is diversified.  Ecommerce/Fulfillment is a relatively small portion but, obviously, represents the fastest growing end market:

The company has completed a number of acquisitions over the past couple of years in order to diversify both products and end markets.  The most recent acquisition, Nortech Packaging, was purchased for ~$36mm or 5.7x EBITDA and provides after-market servicing of industrial packaging machines.  This, relatively small, acquisition is representative of some of the interesting end markets and low valuations that have been a staple of their acquisition strategy.  

Valuation

As stated above, we are valuing ITP on a “normalized” basis since earnings will obviously be depressed this year and, likely, next year.  We think this is the only way to value quality companies that should eventually recover to prior levels.  The simple math on our normalized number is to take 2019 earnings and pro-forma them for acquisitions.  2019 revenue was $1.2bn with adj. EBITDA of $172mm (margin of ~15%).  If we add LTM EBITDA of Nortech, we come up with a “normalized” EBITDA of ~$178mm.  After adjusting ND for the acquisition and deal-related tax benefits, we see the company trading at ~6.5x “normal” (remember to adjust numbers since stock price in CAD while rest of financials are in USD).  While valuation will look much higher this year, we think ITP is a strong acquisition target for a larger packaging company looking through the cycle.  Other packaging deals have been done at between 8-10x (obviously pre-COVID).  This represents upside of ~50-120% under an acquisition scenario.  We are not playing for this but think it is clearly a possibility.

Major Risks

• Input costs increasing – raw materials include resin, paper and adhesives

• Continued depressed demand resulting from extended COVID lockdowns

• Stupid acquisition

Catalyst

- Earnings ramp after COVID subsides

- Potential acquisition target