Research – Supremex

Supremex

• market cap of $31mm at $1.12
• they have $100mm of net debt
• in Q220 had earnings of 7c, EBITDA of $6.9mm, revenue of $47.7mm
• revenue was flat yoy, envelope revenue was down 3.5%
• net cash flow from ops was $10.7mm, up from $5mm yoy
• they get $22mm of revenue from Canadian envelope segment, $10.6mm from US envelope segment
• EBITDA was $14.6mm from H1 – so that is $30mm of EBITDA on a $130mm EV
• leading manufacturer of envelopes and paper packaging
• operate 13 facilities across 6 provinces in Canada, 3 facilities in US
• manufactures stock and custom envelopes
• corrugated boxes, folding carton packaging, e-comm fulfillment solutions
• also these products: Conformer Products®1, polyethylene bags for courier applications, bubble mailers, Enviro-logiX®2and Tyvek®3and other related products such as RFID protective envelopes, X-ray envelopes, medical and file folders, repositionable notes, membership cards as well as labelling products
• Q220 results
• they have been developing new e-comm relationships
• extracting synergies from Royal Envelope acquisition
• they bought Royal Envelope for $27mm – had $30mm of revenue
•                 margins roughly the same as SXP – from Q120 call
• if I assume Royal had 15% EBITDA margins like SXP they would have bought it at 6x EBITDA – not exactly a steal if this is the case
• they are planning to use Royal capacity to expand US business
• said they can increase production 10-15% now without any more bodies
• their envelope segment revenue is declining
•                 down 4.7% yoy in Canada
•                 down 1% yoy in US
• revenue from packaging and specialty products has been up – 8.9% yoy
• 54% of revenue came from packaging in Q220
• I’m guessing that the stock tanked because of comments like this, though it seems like they’ve righted the ship and the stock is still down:

We announced with Q1 results that in April, we were experiencing a revenue decline of approximately 20% on the legacy business and 6%, including Royal Envelope. Fortunately, between the combination of continued onboarding of e-commerce wins and a general improvement in market conditions starting in mid-May and into June, we were able to finish the quarter at essentially flat for the corresponding quarter in 2019.

• it lines up with the chart – stock was doing pretty well until May 14 when it tanked on earnings and then kept going
• when you go back and look at last 10 years, it doesn’t really look like a melting icecube as a whole though the envelope side obviously is

• they have been using acquisitions to grow/maintain the top line, so there’s that
• even with the underlying envelope business shrinking, the fcf is still reasonably strong and this year’s FCF before WC is setting up to be $20mm+
• EBITDA seems to have stabilized and it looks on track to be higher yoy even with the pnademic
• so again, it may not be a growth business, but it isn’t a disaster and it generates a lot of cash
• there has been a couple of insider buys around the current stock level – $1.27ish
• I don’t really get why this stock is as cheap as it is TBH, the bad news from Q1 didn’t really come to pass but the stock never recovered from it
• 1.5-2x 2020e FCF (I’m not including acquisition capex) seems a little low

I bought some of this one last week.  Not expecting the world but do think it can get back to $2.