CCL Industries: Growth Investments Are Paying Off (OTCMKTS:CCDBF)

Introduction

CCL Industries (OTCPK:CCDBF) (TSX:CCL.B:CA) (TSX:CCL.A:CA) is an increasingly important player in the RF and RFID technology used by stores to reduce the amount of theft. On top of that, the company is the world’s largest converter of pressure sensitive and extruded film materials for a wide range of applications in the consumer packaging, healthcare and chemicals sector while it also is an important producer of labels.

There are two different classes of equity outstanding for CCL Industries. The 11.8M Class A shares are voting class shares whereby each share gets one vote while the 166M Class B shares have no voting rights other than in very specific situations. The economic rights for both shares are the same except for the dividend policy: The Class B shares are entitled to an annual dividend that’s one cent higher than the A shares. In this article, I will refer to the Class B shares. The base currency in this article is the Canadian Dollar. This article is meant as a follow-up article to previous coverage. You can read the previous article here.

The company’s website predominantly uses “download only” files, but you can find all relevant documentation here.

I’m still focusing on the free cash flows

I was pleasantly surprised when I saw CCL’s financial results for the first quarter of the year. The total revenue increased by approximately 5% while the COGS increased by just around 4%. And as you can see below, this resulted in a gross profit increase from C$473M to C$515M, which represents an 8.9% increase.

While that obviously is good news, CCL did have to deal with higher SG&A expenses which increased by approximately C$17.6M but it also recorded a C$5.2M higher income from equity-accounted investments while a C$0.8M restructuring charge which was incurred in Q1 2023 no longer recurred in 2024. On top of that, the net finance cost decreased and this allowed CCL to report a pre-tax income of C$252.5M, an increase of almost 15% compared to the first quarter of 2023. The net income was C$192.1M which represents an EPS of C$1.08 per share.

Considering the earnings report was pretty strong, I was hoping to see the cash flow statement would show an equally strong free cash flow performance.

The total operating cash flow was C$171M on a reported basis, but this includes a net investment in the working capital position of approximately C$170M. On the other hand, it also includes just C$32.7M in cash taxes, which is approximately C$28M lower than the total tax bill shown in the income statement. The lease payments totaled C$12.4M, resulting in a total adjusted operating cash flow of C$301M.

The total capex was high, at C$179M. That’s more than twice the C$74.9M in depreciation and amortization expenses incurred in the first quarter, a clear sign of the company investing in growth.

The underlying free cash flow, adjusted for working capital changes but including growth investments, was C$122M. That’s approximately C$0.69 per share.

I think it’s important to understand the details on the capex requirements. Not only will the company spend C$455M on capex this year (which is approximately 40% higher than the depreciation rhythm), it’s also clear the first quarter was very capex-heavy as almost 40% of the full-year capex was already spent in the first quarter of the year. Unfortunately, CCL Industries does not provide a breakdown between sustaining capex and growth capex, but considering two new plants in Vietnam and Singapore will come online in 2024 while it’s planning to start the construction of a new plant in Turkey in 2025.

And CCL can easily continue its growth path. Despite the elevated capex, CCL is still spending less than its incoming operating cash flow while its balance sheet is flush with cash. As you can see below, CCL Industries’ balance sheet has a positive working capital position of almost C$1.4B, including almost C$750M in cash. The balance sheet does contain about C$2.14B in gross debt, resulting in a net debt position of approximately C$1.4B.

With an adjusted EBITDA of C$368M and approximately C$357M accounting for lease amortization, the net debt to EBITDA ratio (excluding the impact of leases) was approximately 1.

Investment thesis

At the current share price of approximately C$69/share, CCL’s enterprise value is approximately C$13.7B, which means the stock is currently trading at just under 10 times EBITDA. That’s not cheap, but CCL Industries has shown to be resilient and as the company continues to invest in growth, its revenue and EBITDA will likely continue to increase as well. The consensus estimates are calling for a mid-single digit EBITDA increase in the next few years, while I also anticipate the net debt to continue to decrease (assuming no large M&A transactions will occur). I think we can look forward to a C$1.55B EBITDA (adjusted for lease payments) in 2026 while the net debt will decrease to approximately C$750M (I’m expecting C$1.05B in free cash flow in the 2024-2026 period after growth capex and after dividends, and I’m assuming C$400M in acquisitions in this scenario). This would reduce the forward EV/EBITDA multiple to around 8.25-8.5.

I currently have no position in CCL Industries, but I think any dip could be a moment to start accumulating stock.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.