CAS CN

Publicly traded companies mentioned herein: Cascades Inc (CAS CN), Sunoco LP (SUN)

Highlights

The presenter is long Cascades Inc (CAS CN), the 6th largest producer of containerboard in North America, the 4th largest producer of tissue products, and one of largest egg carton manufacturers. He cites several reasons to consider this an attractive investment, starting with an unjustified significant discount to its peers. Secondly, he sees hidden asset value in the company which may serve as one of several near- to medium-term catalysts. Thirdly, there is an ESG angle that should gain more attention from investors.

On the valuation, the stock is currently trading at 4.7x EBITDA compared to its peer group at 7.5x - 8.5x. Historically, Cascades has traded at a 1-turn discount to the peers, but the discount has widened to 3-turns. The presenter cannot find any justification for this widened discount and views it as unsustainable. 

The hidden assets are related to the company’s PP&E. Most investors might look at this line item and assume it’s paper mills. However, the company owns about 70 properties across North America which are not mills. Most are logistics, manufacturing and warehouse facilities located in valuable urban or suburban areas. The presenter’s view is that many of these properties could be sold outright or sold in leaseback deals– unlocking significant value for the company relative to market cap. 

The presenter values these properties (excluding the paper mills) at $1.3B compared to the company’s market cap of $1.5B (pro forma). The properties are valued on the balance sheet at $800MM. Historically, the company has sold facilities only during a formal consolidation of operations. Management is aware of investor suggestions that they evaluate outright sales or sale-leasebacks on a number of facilities located in valuable suburban areas such as Toronto, Philadelphia, and Memphis. The company trades at 4.7x EBITDA and could sell these assets at 20x EBITDA to a financial player, lease them back and unlock massive cash flow.

It isn’t known to what extent the company will act on this idea. The presenter only knows that management reacted positively to the idea and he wouldn’t be surprised if management were seriously evaluating the proposal now.

The presenter views the sale-leasebacks as one of a few potential near-term catalysts that could positively re-rate the stock. Share repurchases represent another accretive near-term catalyst. The company historically was not active in buying back stock. But upon release of Q2 earnings this year, they went into the market every trading day and bought the maximum number of shares they were allowed to buy (Canadian law requires this disclosure through the SEDI system). They’ve repurchased about 2% of their stock in the last 10 weeks and the presenter expects this support to continue. 

Cascades also has a differentiating factor in manufacturing vs. its peers that sometimes negatively impacts its margin profile. Cascades uses a largely recycled fiber vs. virgin forest fiber as their primary input. Over time, that factor can work for or against the company from a margin perspective, but it does make the company more attractive from an ESG standpoint. As ESG continues to become a more important global asset class, this differentiating factor should become another catalyst for the stock over time.

The business today is growing nicely based on volume growth as well as through price hikes this year. Consensus estimates are $460MM in EBITDA for 2021 and $600MM for next year. There is further upside as the company has a new plant coming online in Virginia at the end of ’22 which he estimates will push EBITDA above $700MM once that facility ramps up.

The last potential catalyst is that the company may finally separate its tissue and containerboard businesses. Nearly all of Cascades’s peers have done this already because it unlocks value on two businesses with very different profitability. Containerboard represents 75% - 80% of Cascades’s EBITDA. Some shareholders are urging the company to separate the tissue business for this reason. Given that Cascades recently sold its EU operations, that move signaled to the market that management has become more willing to engage in selling assets.

There’s also a 50% JV with Sunoco (SUN) in industrial paper products, as well as a large egg carton business. If the company begins selling assets, these could also be valuable potential spinoffs.

The stock is trading at $14.50 per share. At a 1-turn discount to peers (where they’ve historically traded), the stock would be $25/share. The presenter sees it as likely that the company goes through with at least some real estate sales. Assuming 30% of the real estate is sold, the presenter values the stock at north of $30. And if management goes through with splitting off the tissue business, values approaching $35 - $40 are plausible. 

The combination of these catalysts and the inexplicably higher discount at which the stock currently trades suggests very little downside risk ($3 per share) with a potential 2x upside.

The company has a pro forma market cap of roughly $1.5B and an EV of roughly $2.8B. Those figures are slightly different from Bloomberg data because the company sold their European operations on Oct. 25 and that has yet to be reflected in Bloomberg numbers. Leverage is modest at 2x.

Q: Can you provide a bit more color on the upside case with the real estate sales?

A: If you take 30% of the real estate portfolio and are able to value that at $300MM - $400MM in a sale, the proceeds could be used to buy back stock. That effort could bring the stock to $30 per share.