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RICHARDS PACKAGING INCOME FD RPI.UN
April 20, 2015 - 12:14pm EST by
andrew152
2015 2016
Price: 15.85 EPS 0 0
Shares Out. (in M): 12 P/E 0 0
Market Cap (in $M): 187 P/FCF 0 0
Net Debt (in $M): 32 EBIT 29 0
TEV (in $M): 219 TEV/EBIT 7 0

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  • Canada
  • Packaging
  • Potential Acquisition Target
  • Discount to DCF
  • Dividend
  • Industry Consolidation
 

Description

 
Market Profile
 
  • Ticker: RPI-UN
  • Current Price: $15.85
  • 52 Week Range: $11.90 - $16.69
  • Market Cap: $186.93 Million
  • Shares Out.: 11,720,313
  • Average Vol. (3m):8,992
  • EPS: $0.68
  • P/E: 23.3x
  • P/B: 1.9x
  • EV/Revenue: 1.0x
  • EV/EBITDA: 9.2x
  • Beta (1Y, weekly): 0.10
  • EBIT Margin: 9.3%
  • Net Inc. Margin: 3.8%
  • Cash: $1.13 Million
  • Debt: $32.43 Million
 
Company Overview
Richards Packaging is a 102 years old Canadian packaging company with stable and growing
business. It is the leading packaging distributor in Canada, and third largest in North America. It
has a large and diversified customer base of over 12,000 that includes regional food, wine and
spirits, cosmetic, specialty chemical, pharmaceutical and other companies throughout North
America. This large and diversified customer base provides robust breadth and depth and
safeguards against any major volatility in revenue. Richards Packaging is a full-service
packaging distributor targeting small- and medium-sized North American businesses. It has
operated since 1912 and currently serves over 12,500 regional food, wine and spirits, cosmetic,
specialty chemical, pharmaceutical and other companies from 18 locations throughout North
America.
 
Fundamentals continue to look good for this company. Organic growth, cost efficiencies, and a
charging US economy will add boost to its fortunes in the next few years. A strong US dollars
makes it even more compelling for investors in the US to look at this company as an attractive
investment opportunity. Another key factor to consider is the mergers and acquisition (M&A)
activities in the packaging industry that continues to show a strong upward trend. A company
like Richards Packaging can be an attractive target for bigger players in the industry.
 
Highlights
 
• Focusing on a diversified customer base dominated by 100 small regional
premium product marketers
• Provides a complete one stop source of packaging solutions - Richards
Packaging provides design and development services and comprehensive
logistics management
• One of the largest distributors of European and Asian glass for the specialty food,
wine and spirit markets
• Largest supplier of packaging to the prescription drug and pharmaceutical
markets in Canada
• Largest distributor of surplus packaging
• Only major distributor with dedicated in-house plastics manufacturing
 
 
Value Drivers
• Within the North American Packaging Industry a $3 billion distributor-based
market for rigid packaging exists
• Industry consolidation - In 2014, there were over 187 acquisitions in the global
packaging industry, up 23% over 2013
• Energy prices continue to be a major factor for the industry affecting glass
furnace economics, resin costs and freight costs
• Financing structures in place at most packaging companies are similar to that of
an income trust, with significant use of debt priced anywhere from 3% to 7%
• Distributions increase from $0.79 per unit in 2013 to $0.87 in 2014 (significantly
high payout at 71%)
 
 
 
 
 
 
 
 
 
 
 
 
 
Discounted Cash Flow Analysis
• Significantly low betas within the industry: Canadian market (0.34) compared to the US
(0.89)
• Even with high discount rates, and low growth and exit multiples, target price is still
above current stock price
• Used 3% revenue growth for the projection period (management guidance)
• Cost margins maintained at historic 84% of sales
 
 
Table: 

Richards Packaging Income Fund - Cash Flow Projections

 

 

 

 

 

 

 

 

FY 2015E

FY 2016E

FY 2017E

FY 2018E

FY 2019E

 

              

 

Revenue:

      

$218,654

 $225,213

 $231,970

 $238,929

 $246,096

EBITDA:

      

$34,352

 $35,382

 $36,444

 $37,537

 $38,663

Operating Income:

    

$29,978

 $30,878

 $31,804

 $32,758

 $33,741

 

              

 

Less: Taxes

      

($10,492)

($10,807)

($11,131)

($11,465)

($11,809)

 

              

 

Plus: Depreciation

    

$4,373

$4,504

$4,639

$4,779

$4,922

 

              

 

Less: Increase in Working Capital:

  

$0

$0

$0

$0

$0

Less: Capital Expenditures

  

($1,093)

($1,126)

($1,160)

($1,195)

($1,230)

 

              

 

Unlevered Free Cash Flow

 

$22,766

 $23,449

 $24,152

 $24,877

 $25,623

Present Value of Free Cash Flow

 

$22,089

 $21,418

 $20,768

 $20,138

 $19,527

Valuation Summary & Target Price

•       $22.32 from DCF & Comps. à 40% upside

 

Comparable Company Analysis

Comparable Companies:

•       Trade at higher multiples in comparison to RPI

•       Have higher Gross Margins and a higher 3-year Revenue CAGR

Within this valuation methodology, used three separate valuation multiples: EV/Revenue, EV/EBITDA, and P/E.

 

 

Comparable Companies

 

 

 

 

 

 

 

 

($ in Thousands Except Per Share Amounts in Dollars and Share Counts in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Operating Statistics

 

Capitalization

 

 

 

 

Revenue,

 

Share

Equity

Enterprise

Revenue

EBITDA

Earnings

Gross Margin

3 Year CAGR

Company Name

Price

Value

Value

2014

2014

2014

2014

2014

CCL Industries Inc

 $138.49

 $4,813,344.30

 $5,244,517.97

 $2,585,637.00

 $481,590.00

 $216,566.00

26.8%

26.8%

Intertape Polymer Group Inc

 17.41

 1,053,854.48

 1,200,810.34

 944,232.04

 111,502.59

 41,611.03

20.1%

1.1%

Winpak Ltd

 38.59

 2,508,350.00

 2,346,421.95

 914,601.53

 175,081.80

 91,093.50

28.5%

6.5%

ZCL Composites Inc

 6.50

 196,844.17

 170,809.88

 170,835.00

 25,384.00

 16,316.00

20.2%

10.4%

Imaflex Inc

 0.44

 21,868.36

 33,210.00

 56,051.62

 1,949.97

 206.80

10.3%

6.4%

Leading Brands Inc

 4.71

 13,754.65

 11,984.90

 15,313.47

 2,222.34

 1,163.30

45.1%

-6.8%

 

 

 

 

 

 

 

 

 

Maximum

 $138.49

 $4,813,344

 $5,244,518

 $2,585,637

 $481,590

 $216,566

45.1%

26.8%

75th Percentile

 33.30

 $2,144,726

 $2,060,019

 $936,824

 $159,187

 $78,723

28.1%

9.4%

Median

 $11.96

 $625,349

 $685,810

 $542,718

 $68,443

 $28,964

23.5%

6.4%

25th Percentile

 5.15

 $65,612

 $67,610

 $84,747

 $8,013

 $4,951

20.1%

2.4%

Minimum

 0.44

 $13,755

 $11,985

 $15,313

 $1,950

 $207

10.3%

-6.8%

 

 

 

 

 

 

 

 

 

Richards Packaging Income Fund

 $15.95

 $186,939

 $218,240

$212,285

$23,797

$8,022

15.7%

5.2%

 

Comparable Companies

                

($ in Thousands Except Per Share Amounts in Dollars and Share Counts in Thousands)

      
 Conclusion & Investment Thesis

 

Based on a discounted cash flow analysis, its continued growth driven by operational results suggests 40% upside from these levels. This coupled with a 5.5% to 6% annual distribution yield for the next 24 months makes it a good value play. 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

•       Within the North American Packaging Industry a $3 billion distributor-based market for rigid packaging exists

•       Industry consolidation - In 2014, there were over 187 acquisitions in the global packaging industry, up 23% over 2013

•       Energy prices continue to be a major factor for the industry affecting glass furnace economics, resin costs and freight costs

•       Financing structures in place at most packaging companies are similar to that of an income trust, with significant use of debt priced anywhere from 3% to 7%

Distributions increase from $0.79 per unit in 2013 to $0.87 in 2014 (significantly high payout at 71%)

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