Latest Beacon Report for those that haven't seen It.Supremex Inc. (SXP-T) Recovery is More Gradual Than Anticipated but The Worst is Behind Us
Packaging Continues to Be a Drag, Envelopes Resilient and Margins Bounce Back. SXP reported Q3/FY23 results that were below expectations mainly due to weaker performance in its Packaging segment. Total revenues were $69.8 MM, well below our $79.0 MM forecast and consensus $77.2 MM. The revenue miss was attributed mainly to weaker revenues from the packaging segment (discussed shortly). Adjusted EBITDA was $11.7 MM, below our $13.3 MM forecast and consensus $12.2 MM. The bright spot was an adj. EBITDA margin of 16.8%, which was inline with our forecast and 100bps ahead of consensus. Note that adj. EBITDA excluded ~$1.5 MM of retroactive COVID-related employment retention credits that benefited its US operations. EPS (diluted) was $0.19 and adjusted EPS (diluted) was $0.16 vs our forecast of $0.19 and consensus $0.17.
Envelope Segment is Helped by Royal’s Solid Performance, Notwithstanding Slower-Than-Expected Recovery. Overall revenue was up modestly y/y, with 22.1% y/y price increases helping offset 17.8% y/y volume declines. We estimate organic growth was ~-22%, just slightly below our -20% forecast. This was driven by y/y declines in both Canada (-10.4% y/y) and the US market (-44% y/y ex. contribution from Envelope). Royal Envelope bounced back quickly, contributing $11.1 MM in revenues (up 22% from $9.1 MM registered in Q2/FY23) and exceeding our expectations. Management continued to point to destocking activities by its customers, but believes the worst is behind us as evidenced by solid performance at Royal (we agree) and low inventory levels. Demand is picking up, albeit at slower than anticipated pace. Another positive from this segment is EBITDA margin of 19.3%, which was relatively flat q/q and remained above pre-peak-period (FY22) range of 15%-19%.
Weak Packaging Performance Not Up to Par but Margins Have Bottomed. We estimate that organic growth in the Packaging segment was ~-20%, after adjusting for revenue loss from the wind down of Durabox and the contribution of Impression Paragraph and Graf-Pak. Weakness is attributed to SXP’s exposure to the market driven by discretionary spending, eCommerce and Health & Beauty being the culprits (~$0.7 MM). Performance in this segment continued to disappoint as we expected this to be a growth engine for the company. The segment is impacted by continued reduction in discretionary spending across the economy. On a positive note, segment EBITDA margins expanded by 100bps q/q and, following the recent rationalization of operations in this segment, we should continue to see improvements. This is certainly encouraging to see considering the continued revenue headwinds.
Fundamentals Remain Strong and We Look Forward to Seeing Packaging Margins Improve (Hopefully). SXP’s fundamentals remain strong in our view, with strong FCF generation ($11.6 MM in Q3/FY23) helping the company reduce its debt (down by~$9.5 MM sequentially) and maintain its ultra-low leverage (down to 0.6x). Strong Envelope performance continues to solidify one pillar of our investment thesis which is the Envelope segment being a strong cash generator (evidenced by strong margin despite revenue headwinds) to fund SXP’s pivot towards packaging. The company is also active on its NCIB having purchased 102,900 shares during Q3/FY23 and another 45,200 after that. We believe Q4/FY23E results will be critical for multiple expansion. We revised our forecasts to reflect a slower path towards the ~20% EBITDA margin for Packaging. We maintain our valuation multiple at 4.5x, and our TP revision to $8.50 (vs. $9.00 prior) is mainly a function of our revised forecasts.
We maintain our BUY recommendation. BUY (Unch.) $8.50 (was $9.00) Recent/Closing Price $4.09 12-month Target Price $8.50 Potential Return 111% Dividend Yield 3.4% 52 Week Price Range $4.14 - $7.89 Estimates YE: Dec 31st FY22 FY23E FY24E Revenue ($M) $273 $304 $306 Adj. EBITDA ($M) $56 $52 $58 Adj. EPS (FD) $1.09 $0.80 $1.00 Previous Estimates Revenue ($M) $321 $324 Adj. EBITDA ($M) $57 $62 Adj. EPS (FD) $0.90 $1.08 FCF (levered) ($M) $24 $45 $53 Valuation FY22 FY23E FY24E EV/Sales 0.8x 0.7x 0.7x EV/EBITDA 3.7x 4.0x 3.6x P/E 3.8x 5.1x 4.1x Stock Data Basic 25.8 FD 25.8 Basic $105 FD $105 Net Debt $102 EV $208 About the Company Stock Performance Q3/FY23 Results All prices in C$ unless otherwise indicated Supremex, Inc. manufactures and markets envelopes and mail packaging products. It provides a wide range of products in an array of styles, shapes and colors, which allows it to offer customers a high degree of flexibility and customization.