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On today’s Breakouts report, there are 62 stocks on the positive breakouts list (stocks with positive price momentum), and 10 stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a security that is on the negative breakouts list with its unit price dropping 13 per cent over the past six trading sessions - Richards Packaging Income Fund (RPI.UN-T).

While the security is now in oversold territory, don’t expect a quick rebound in the unit price. Given this security’s valuation, the stellar 58 per cent year-to-date gain, and the lack of near-term earnings growth forecast, investors are likely to seek buying opportunities elsewhere in other areas such as economic recovery plays.

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Last week, positive clinical trial data released by Pfizer Inc. caused coronavirus plays, such as telemedicine and stay-at-home stocks, to spiral down. Now, positive Phase 3 data released by Moderna Inc. will likely deepen these losses as optimism grows that an effective vaccine will potentially be widely available in the first half of 2021.

Richards Packaging has seen its revenue rocket higher with sales of hand sanitizers and disinfectants spiking during the coronavirus pandemic.

On Oct. 9, the unit price closed at a record high. The sole analyst covering this company expects the unit price to rally nearly 20 per cent over the next 12 months. However, the unit price may not rebound until earnings growth is expected to resume. In other words, with buyers absent, the unit price may continue to drift lower until an acquisition is announced.

A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The Fund

Mississauga-based Richards Packaging is top packaging distributor in Canada and North America’s third largest packaging distributor. Richards Packaging has sales and distribution centers, and manufacturing plants located across North America. Consequently, the Fund has currency risk, benefiting from a declining Canadian dollar relative to the U.S. dollar. Every one cent move in exchange rate impacts revenue by $700,000.

Richards Packaging specializes in servicing small and mid-sized companies offering glass and plastic container manufacturing and distribution services. Its customer base is well diversified serving roughly 17,000 companies across various industries including the food and beverage sector, cosmetics, and the healthcare market segment.

On May 31, the company completed a $64-million purchase of Clarion Medical Technologies Inc.. Based in Ontario, Clarion provides medical and aesthetic products and services including laser technologies, diagnostic equipment, and skincare to hospitals, clinics, and private practices.

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Richards Chief Executive Officer Gerry Glynn said, “We are delighted with this acquisition because it represents a perfect strategic fit for Richards. Clarion continues to strengthen and expand our position in the healthcare market which has been the cornerstone for Richards Packaging since its inception.”

Quarterly earnings

On Oct. 29, the Fund reported strong third-quarter financial results. The company has benefited from strong demand hand sanitizers and disinfectants boosting its cosmetics packaging revenue.

Revenue came in at $128.6-million, up 47 per cent year-over-year. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $25.65-million, more than double the $12.66-million reported during the same period last year. The EBITDA margin was 19.9 per cent, compared to 14.5 per cent reported last year. Distributable cash flow per unit was $1.48, up from 73 cents reported last year.

The unit price advanced 1 per cent the following trading day on high volume with over 76,000 units traded.

Looking ahead, the company discussed decelerating growth in the MD&A (Management’s Discussion and Analysis), stating, “Fourth quarter revenues in October grew at 25 per cent as the impact of coronavirus related demand wains. Ontario and Québec have imposed a partial shutdown of clinics which will significantly affect Clarion sales going forward. It is important to consider the impact of the first three quarters as comparators for 2021 which will likely result in double digit negative growth and will likely result in adjusted EBITDA as a percent of sales migrating back towards 14.5 per cent. Also, the exchange translation at the current exchange rate of U.S./Cdn. 76 cents will be flat over the same period in 2019.”

Investment thesis highlights

  • Has delivered strong growth year after year.
  • Provides stable monthly income.
  • Near-term price momentum is negative. Buyers are absent given that earnings growth is anticipated to decelerating in the near-term.
  • Potential catalyst: Potential future acquisitions.
  • Significant insider ownership. According to Bloomberg, Mr. Glynn owns over 20 per cent of the units outstanding, aligning his interests with unitholders' interests.

Distribution policy

The Fund pays its unitholders a monthly distribution of 11 cents per unit, or $1.32 per unit yearly, equating to a current annualized yield of 1.8 per cent. The monthly distribution has been maintained at 11 cents per unit since early 2017.

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Last quarter, the cash flow payout ratio stood at 22 per cent. In 2019, the payout ratio was 49 per cent, suggesting the distribution is sustainable.

Analysts' recommendations

This small-cap security with a market capitalization of $771-million is only covered by one analyst - Jim Byrne, an analyst at Acumen Capital. Mr. Byrne has a “buy” recommendation and $86 target price, implying the unit price has 19-per-cent upside potential.

Financial forecasts

Richards Packaging has delivered solid growth over the years. In 2019, revenue climbed 5.1 per cent to $334-million (2.6 per cent organic, or internal, growth and 2.5 per cent from foreign exchange). In 2018, revenue increased 7.2 per cent (6.1 per cent organic growth) to $318-million. Revenue was $297-million in 2017 (3.5 per cent organic growth), $287-million in 2016 and $249-million in 2015. Adjusted EBITDA was $48.06-million in 2019, $45.96-million in 2018, $40.56-million in 2017, $37.8-million in 2016 and $29.9-million in 2015. Distributable cash flow per unit was $2.73 in 2019, $2.52 in 2018, $2.03 in 2017, $2.02 in 2016, and $1.52 in 2015.

Looking forward, Mr. Byrne is forecasting revenue to come in at $467-million in 2020, up from $318-million in 2019, $446-million in 2021 and $475-million in 2022. He expects adjusted EBITDA will increase to $88.2-million in 2020, up from $48-million in 2019, and decline to $69-million in 2021 and reaccelerate to $75-million in 2022.

Valuation

According to Bloomberg, the Fund is trading at an enterprise value-to-EBITDA multiple of 12 times the 2021 earnings estimate, above its three-year historical average of approximately 10.4 times but below its peak multiple of just under 14 times during this time period.

Insider transaction history

Over the past year, there has not been any buying or selling activity in the public market reported by insiders.

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Chart watch

Year-to-date, the unit price has rallied 58 per cent.

This security has delivered double-digit price returns (not including the distribution yield) to investors for years. To illustrate, the returns for the past several years are as follows: 30 per cent in 2019, 12 per cent in 2018 (despite the fourth-quarter market meltdown), 26 per cent in 2017, 29 per cent in 2016, 44 per cent in 2015, 26 per cent in 2014, 23 per cent in 2013, and 14 per cent in 2012.

However, over the past six trading sessions, the unit price has declined 13 per cent from the $83 level to the low $70s. Given this swift downdraft, the security is now in oversold territory. The relative strength index is at 26. Generally, an RSI reading at or below 30 reflects an oversold condition.

In terms of key technical resistance and support levels, the unit price has initial overhead resistance around $80, near its 50-day moving average (at $80.73). After that, there is a ceiling of resistance around $86, its record closing high reached on Oct. 9, 2020. Looking at the downside, the unit price has initial support around $70. Failing that, there is support around $65, and strong technical support at $60, close to its 200-day moving average (at $60.63).

This small-cap security is thinly traded, which can increase price volatility. The three-month historical daily average trading volume is approximately 13,000 units.

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

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If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Monday's breakout stocks

Positive BreakoutsNov. 13 close
RZZ-XAbitibi Royalties Inc. $26.75
ALC-TAlgoma Central Corp $12.72
ATZ-TAritzia Inc. $23.55
AI-TAtrium Mortgage Investment Corp. $11.86
ACQ-TAutoCanada Inc $26.10
AYA-TAya Gold & Silver Inc. $3.34
BHC-TBausch Health Companies Inc. $25.74
BEI-UN-TBoardwalk Real Estate Investment Trust $31.24
BRE-TBridgemarq Real Estate Services $14.20
BIP-UN-TBrookfield Infrastructure Partners LP $66.95
BPY-UN-TBrookfield Property Partners LP $20.06
CP-TCanadian Pacific Railway Ltd $436.90
WEED-TCanopy Growth Corp. $32.08
CCL-B-TCCL Industries Inc $58.37
CIA-TChampion Iron Ltd. $4.15
CWEB-TCharlotte's Web Holdings Inc. $5.45
CHP-UN-TChoice Properties REIT $13.46
CTS-XConverge Technology Solutions Corp. $3.26
CSW-A-TCorby Spirit and Wine Ltd $16.15
CL-CNCresco Labs Inc. $11.28
CRH-TCRH Medical Corp $3.27
CRR-UN-TCrombie Real Estate Investment Trust $14.55
ECN-TECN Capital Corp. $5.70
EMX-XEMX Royalty Corp. $3.99
XTC-TExco Technologies Ltd $8.11
EXE-TExtendicare Inc $5.89
FRX-TFennec Pharmaceuticals Inc. $11.24
FTT-TFinning International Inc $23.12
FM-TFirst Quantum Minerals Ltd $16.12
GLXY-TGalaxy Digital Holdings Ltd. $5.65
GFL-TGFL Environmental Inc. $30.04
GSY-Tgoeasy Ltd $82.80
GTII-CNGreen Thumb Industries Inc. $26.73
HR-UN-TH&R Real Estate Investment Trust $12.30
HWX-THeadwater Exploration Inc. $1.73
HCG-THome Capital Group Inc $27.40
HNL-THorizon North Logistics Inc $5.67
HBM-THudBay Minerals Inc $6.99
IBG-TIBI Group Inc. $7.34
ITP-TIntertape Polymer Group Inc $21.50
LAS-A-TLassonde Industries Inc $168.90
LNF-TLeon's Furniture Ltd. $19.96
LNR-TLinamar Corp $58.25
MRE-TMartinrea International Inc $12.83
MKP-TMCAN Mortgage Corp $15.15
DR-TMedical Facilities Corp $6.54
TPX-B-TMolson Coors Canada Inc. $58.07
GRA-XNanoXplore Inc. $3.52
NFG-XNew Found Gold Corp. $4.53
PBL-TPollard Banknote Ltd. $25.69
PRMW-TPrimo Water Corp. $19.59
QTRH-TQuarterhill Inc. $2.70
SEC-TSenvest Capital Inc. $152.00
SOT-UN-TSlate Office REIT $3.92
STLC-TStelco Holdings Inc. $15.98
SOY-TSunOpta Inc. $11.61
TFII-TTFI International Inc. $66.10
TCL-A-TTranscontinental Inc $16.94
WCN-TWaste Connections Inc. $142.80
WPRT-TWestport Innovations Inc $3.42
WILD-TWildBrain Ltd. $1.78
XBX-XXebec Adsorption Inc. $5.55
Negative Breakouts
AIF-TAltus Group Ltd $51.55
BBD-B-TBombardier Inc $0.28
DOO-TBRP Inc $63.39
GUD-TKnight Therapeutics Inc $5.39
L-TLoblaw Cos Ltd $65.70
LABS-TMediPharm Labs Corp. $0.75
RPI-UN-TRichards Packaging Income Fund $72.01
SIS-TSavaria Corp. $13.47
VGCX-TVictoria Gold Corp. $13.29
WEF-TWestern Forest Products Inc $0.85

Source: Bloomberg

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