Are we really ready to stop mailing things? Is the all-digital life just around the corner?
Or are you a bit skeptical about the pronouncements of the digerati, believing dead trees will still play a role in our lives for the foreseeable future?
If it’s the latter, I have a suggestion for you: Supremex, Canada’s only coast-to-coast maker of good, old-fashioned envelopes. (Plus a few modern ones, like bubble mailers, courier packages, and biodegradable products, as well.)
The enthusiasm for all things digital and pessimism about the old ways has made Supremex, a former income trust, one of the cheapest stocks on the Toronto Stock Exchange.
According to Standard & Poor’s Capital IQ, the company trades at about 5.6 times forward earnings. Its enterprise value – market capitalization plus net debt – is 0.7 times revenue and less than four times EBITDA, its earnings before interest, taxes, depreciation and amortization.
At the same time, its annual dividend of 12 cents, on the current share price of $1.80, yields a finger-licking 6.6 per cent. (Once you lick your finger, you can moisten the seal on the envelope.)
Supremex’s mediocre per-share price reflects its small size and diminishing prospects; to be sure, the company’s industry is in secular decline.
Sales of $143.9-million in 2011 represented a 6 per cent drop from 2010 levels; the company’s “EBITDA before acquisition costs and restructuring expenses” of $29.5-million was an 11-per-cent decline from the prior year.
Supremex’s means of adjusting its EBITDA suggests it realizes the dilemma and has embarked on growing sales and profits as best it can: acquiring smaller envelope companies to boost its top line while achieving cost efficiencies to bolster the bottom.
In September 2010, Supremex bought B.C.-based Pioneer Envelope for $1.9-million, grabbing its $4-million in annual sales for less than 50 cents on the dollar, according to National Bank Financial analyst Adam Shine. Supremex moved the Pioneer production to its existing plant in Delta, B.C.
The company has also restructured its legacy operations in Montreal and Toronto, consolidating multiple plants into fewer facilities.
Mr. Shine, who seems to be the only analyst actively following the company, has a $2 target price on Supremex shares and a recently upgraded “sector perform” rating. The dividend yield plus potential appreciation to that $2 target represent a 17 per cent return.
(The stock, it should be noted, traded as high as $2.37 on March 5, not long after year-end results were announced; Mr. Shine downgraded it to “underperform” the next day, saying the shares “seem to have gotten ahead of themselves.” He upgraded to “sector perform” April 9, after a decline.)
Supremex is moderately leveraged, with its year-end debt of $51.6-million representing about 1.75 times its EBITDA. In the near-term, Mr. Shine says, the company will use free cash to retire debt, but “acquisitions top the list when it comes to capital deployment.”
“Although we can’t rule out Supremex engaging in M&A in the United States, we believe that it has a preference to grow in the Canadian market, particularly in Quebec and Ontario where the company generates the bulk of its revenues and where it can continue to leverage its manufacturing footprint,” Mr. Shine says.
In the meantime, there’s a return of capital planned beyond the healthy dividend (which, at a payout ratio of just 35 per cent, seems sustainable).
The company is engaged in a normal course issuer bid, saying in December it could repurchase up to 1.5 million shares, which would be 5.1 per cent of outstanding shares and 8.8 per cent of the public float.
In short, Supremex fits the classic profile of a company managing its way through a slow-to-no-growth industry: dividends and buybacks, strategic acquisitions, cost-cutting that maintains healthy margins.
The shares are all wrong for investors who want to ride the new economy to great heights. But for a deep value investor with tech skepticism, well, a purchase of Supremex stock wouldn’t push the envelope at all.
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