Source: SupremeX.

With inflation holding at 4.3 per cent in March, public companies are still feeling the crunch of higher prices.

The Bank of Canada (BoC) has been firm about keeping its benchmark interest rate at 4.5 per cent – the highest since 2007’s Great Financial Crisis – as unemployment remains near a record low at 5 per cent, and overall consumer spending shows resiliency, making it especially difficult to operate at an optimal level without adequate capital on hand.

While the BoC sees inflation nearing its 2-per-cent target by the end of 2024, recent BoC surveys show businesses expecting lower sales growth and consumers planning to cut back on discretionary expenses because of high household debt and higher mortgage refinancing, meaning price normalization alone will not be enough to ensure a company’s sustainable production.

This is why, during uncertain times such as the present moment, many investors tend to limit their pool of prospective allocations to the cash-flowing and the cash-rich. With this thesis in mind, The Market Herald’s Cash-Rich Report introduces you to profitable companies with coffers fortified to weather a multitude of headwinds.

Next up: SupremeX (SXP), est. 1977, Canada’s leading envelope and packaging manufacturer and a top 5 in the industry across North America.

Canada’s only national packaging and envelope manufacturer

SupremeX’s North American network spans 14 facilities across 7 provinces as well as 6 facilities in the U.S., employing approximately 1,050 people, allowing the company to efficiently manufacture and distribute paper and packaging solutions for major national and multinational corporations, resellers, government entities, SMEs and solutions providers.

Envelope segment

The company’s envelope business offers a broad customizable product offering it describes as, “Everything in the letter carrier’s bag.”

It is the leading player in the Canadian space with a market share of approximately 85 per cent and 800 km of cost-effective delivery.

Customers include everyone from fine paper merchants and independent envelope printers, to stationery suppliers and solution providers (such as forms manufacturers and large printers), and statement preparation providers, as well as end-users and organizations who use direct mail.

Source: SupremeX.

Revenue in the segment has grown considerably between 2018 and 2022, now accounting for C$200 million or 73.5 per cent of overall revenue. This is diversified across the U.S. (41 per cent), central Canada (32 per cent), eastern Canada (16 per cent) and western Canada (11 per cent).

2018-2022 envelope revenue

Source: SupremeX.

Packaging segment

SupremeX’s packaging segment offers a vast range of ecommerce packaging, custom boxes, labels and custom envelopes to dial in brand representation and enhance audience interaction.

Customers stem from a wide variety of industries including pharmaceutical, health and beauty, ecommerce, nutraceutical, food and beverage distribution, apparel, and electronics, among others, all of which benefit from over 1,000 km of cost-effective delivery across Canada.

Source: SupremeX.

The packaging segment produced C$72.1 million in revenue in 2022, accounting for 26.5 per cent of overall revenue, which is divided across ecommerce and specialty products (50 per cent), consumer packaged goods (23 per cent), pharmaceuticals (15 per cent) and food (12 per cent).

2018-2022 packaging revenue

Source: SupremeX.

SupremeX’s steady growth, backed up by a robust supply chain, has resulted in an established history of value creation we’ll now examine in detail.

Margin of safety

As the leading player in the Canadian envelope market, SupremeX benefits from minimal competition. Enveloppe Concept and Enveloppe Laurentide, its main rivals, combine for sales of only C$15 million according to management estimates.

The company controls just over 5 per cent of the US$2 billion U.S. envelope market, with significant volume in the Northeast and Midwest, as the North American industry continues to fragment and decline due to digitization, bill consolidation, and a COVID-related reduction in demand for direct and marketing mail.

To put some numbers on the decline, transaction mail volume in Canada and first-class mail volume in the U.S. have decreased over the last five years at 6.2 and 4 per cent CAGRs, respectively.

Conversely, North America’s packaging market is growing thanks to increased ecommerce activity and sustainability trends away from single-use plastics, which support the expansion of paper packaging. Parcel volume in Canada has increased over the past 5 years at a 10.5 per cent CAGR, while package and parcel volume in the U.S. has increased over the past 5 years at an 8.1 per cent CAGR.

These dynamics position SupremeX to:

  1. Maintain its leading position in the Canadian envelope market through consolidation opportunities and leveraging the capacity of its national footprint, while maintaining EBITDA and strong cash flow generation
  2. Pursue growth opportunities in the U.S. envelope market focused on expanding its considerable Northeast and Midwestern presence and ability to reach 60 per cent of the market within 800 km
  3. Build packaging capabilities in attractive North American growth markets, specifically in value-added folding carton, labels and ecommerce

These growth plans are enabled by sound capital allocation, which SupremeX’s management has supplied in droves over the past five years:

Source: SupremeX.

The company, profitable over the past four years, is also structured to self-fund its strategic expansion, setting it apart from the herd of public companies overly reliant on low-interest debt having to scramble given recent monetary tightening.

Source: SupremeX.

Financial results from Q4 2022 continue to demonstrate high-quality management with:

  • A net debt to adjusted EBITDA ratio of 0.9 x
  • Net earnings increasing 36 per cent to C$6.7 million, or C$0.26 per share, versus C$4.9 million, or C$0.18 per share, in Q4 2021
  • Revenue growth of 19 per cent to C$78.8 million
  • The 12th consecutive quarter of YoY improvement in adjusted EBITDA to C$15.3 million, up 25.5 per cent from C$12.2 million
  • The reinstatement of a quarterly dividend in Q1 2022, which has increased 40 per cent YoY as of February 2023

Looking ahead

One of SupremeX’s key advantages to creating shareholder value is the boring nature of its business. While ChatGPT, mega caps, the hottest junior miners and the latest from Tesla’s Elon Musk rule the investment headlines, SupremeX is able to operate under the radar of volatility-inducing mainstream coverage, resulting in a more accurate match between share price and intrinsic value, even if many of its clients are household names.

Source: SupremeX.

Pursuant to future value realization, potential investors should focus on the company’s integration of recent acquisitions, Royal Envelope and Impression Paragraph, with emphasis on sales and cost synergies.

Also worth tracking are any adjustments to near-term inflation – which has decreased from over 8 per cent in June 2022 to 4.3 per cent in March – and a tight labor market, both potentially negative weights on efficiency and asset utilization moving forward.

Finally, the current macro climate could potentially create opportunities to acquire smaller players whose businesses don’t benefit from SupremeX’s expansive operations and long-established supplier relationships, setting the company up to replicate its Canadian dominance in the U.S. market.

SupremeX (SXP) has gained approximately 390 per cent since its COVID low, which serves as a testament to the company’s focus on shareholder value and carefully considered inorganic growth.

Sources

SupremeX’s investor presentation for February 2023.

The materials provided in this article are for information only and should not be treated as investment advice. For full disclaimer information, please click here.


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