While Canaccord Genuity analyst Matthew Lee thinks 2023 could bring “some softness related to customer inventory levels and acquisition integration,” he sees the investing thesis for envelope manufacturer SupremeX Inc. (SXP-T) as “compelling,” pointing to its “substantial cash flow generation, organic growth opportunity in packaging, and M&A track record.”
Calling its valuation “attractive” given its shift towards packaging, he initiated coverage with a “buy” recommendation on Monday.
“Supremex is a Quebec-based envelope and packaging firm that we believe offers investors a solid combination of growth and cash flow buttressed by its prudent M&A strategy,” he said. “The envelope segment provides traditional mailing envelopes to large corporate clients primarily focused on billing and direct advertising. The packaging segment centres on specialized containers built for consumer products. In our view, the combination of Supremex’s two businesses allow the firm to generate substantial cash flows, which can then be reinvested into areas of secular growth”
Mr. Lee set a target of $8.50 per share. The current average on the Street is $9.91.
“The envelope business has counteracted secular industry declines by wielding its 90-per-cent Canadian market share to protect rates while growing the U.S. footprint to offset volume losses,” he said. “On the packaging front, SXP has built out a robust product suite through acquisitions, which we expect will benefit from the longterm growth of the industry and expanding North American market share.”
“SXP trades at a reasonable 3.5 times EV/ F23E EBITDA, which we believe could be fair for a declining envelope business but likely understates the value of packaging, with comparables trading at 7.5 times. As SXP continues its shift towards packaging, we expect a meaningful revaluation could occur.”