Robust Organic Growth And RFID Keep CCL Our Top Pick Our Conclusion
CCL remains our top pick across our packaging/forestry coverage universe.
We reiterate our Outperformer rating and raise our price target to $88 (from
$86) on increased estimates. We were encouraged by management pointing
to Q3 orders so far tracking in line with Q2 consumer activity (with July “very
strong”). We are now projecting organic growth of 6.2% this year (vs. our
prior forecast of +3.5% and 2023 comps of -2.5%), with continued robust
growth of 5.6% in 2025E given momentum across the core CCL segment
and Checkpoint (RFID). With leverage of only 1.2x, the company is well
positioned to be opportunistic with both M&A and share repurchases (~10%
NCIB).
Key Points
Increasing 2024/2025 EBITDA Estimates By 4%/3%: Our 2024 EBITDA
projection is 4% higher at $1.51B (supported by 6.2% organic growth, 1.5%
M&A growth and 20.8% EBITDA margins), while our 2025 estimate is 3%
higher Y/Y at $1.55B (when we have 5.6% organic growth and 20.5%
EBITDA margins) [will probably be closer to high-single-digit annual growth
given future tuck-in acquisitions].
For the CCL segment (~64% of LTM EBITDA), we estimate Y/Y organic
growth of 8.5% in Q3 (year ago -3.6%), near the strong positive 9% comp in
Q2 as activity in consumer electronics rebounds and CPG customers focus
on volume growth. While CCL Design’s recovery is expected to remain
strong, CCL Secure is anticipated to slow in Q3. We forecast segment EBIT
will be up 16% Y/Y, with margins expanding by ~75 bps to 16.7%.
For Avery (~17% of LTM EBITDA), we expect organic growth of 2.0% in the
third quarter (year ago -0.7%) given steady progress (though scale of the
early back-to-season in Q2 adds some uncertainty). We see a more
favorable increase in EBIT contribution (+17% Y/Y), with margins up
~230 bps Y/Y.
For Checkpoint (~13% of LTM EBITDA), we forecast organic growth of
15.0% Y/Y (year ago +4.1%), supported by continued RFID tailwinds (Q2
was up 17.5%) and new Mexico capacity. We note that U.S. peer Avery
Dennison is pointing to ~20% volume growth this year in its RFID business
(Intelligent Labels) given a rebound in apparel and new category adoption. In
terms of EBIT contribution, we see a stronger 34% increase from the
segment, given improved margins, than a year ago (+190 bps) at 15.6%.
We expect Innovia (~6% of LTM EBITDA) to see 10.0% organic growth in Q3
(year ago -34.4%) given guidance of significantly more volumes to core
materials sector customers. UPM’s Raflatac segment, the second-largest
producer of self-adhesive label materials globally (and supplier to CCL), saw
Q2 European volumes up 23% Y/Y. We expect Innovia EBIT to improve by
79% on ~280 bps of margin expansion with the company starting to capture
the benefits of earlier restructuring initiatives.