On today’s TSX Breakouts report, there are 22 stocks on the positive breakouts list (stocks with positive price momentum), and 56 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a security that is on the negative breakouts list. The security is in correction territory down 11 per cent from its record closing high of $50 set on Jan. 13, and is nearing an oversold condition.
The security provides investors with a stable monthly distribution, currently equating to an annualized yield of 3 per cent. Year-to-date, the payout ratio is 48 per cent, suggesting its distribution is sustainable. The company highlighted below is Richards Packaging Income Fund (RPI-UN-T).
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 Richard Packaging is top packaging distributor in Canada and North America’s third largest packaging distributor. Richard Packaging has sales and distribution centres, and manufacturing plants located across North America.
In terms of geographic sales exposure, 60 per cent of total revenue is from the U.S., and the balance, 40 per cent, is from Canada. More specifically, 42 per cent of sales are derived from the following three U.S. cities: Los Angeles, Reno and Portland, Ore. In Canada, four cities, Toronto, Montreal, Winnipeg and Vancouver, account for 33 per cent of sales. Consequently, the Fund has currency risk, benefiting from a declining Canadian dollar relative to the U.S. dollar.
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 approximately 14,200 companies in industries including food and beverage and other packaging (representing 48 per cent of revenue), cosmetics (29 per cent of revenue), and healthcare (23 per cent of revenue).
On Oct. 31, the Fund reported its financial results for the third-quarter. During the third-quarter, the Fund lost two large customers representing approximately $2-million in revenue but still delivered solid growth. Revenue came in at $87.3-million, up 7.2 per cent year-over-year (4.9 per cent organic growth and a 2.3 per cent foreign exchange benefit). Growth was evident across its various business segments. Revenue from cosmetics increased 4.6 per cent year-over-year. The healthcare segment saw its revenue climb 8 per cent. Finally, revenue from the food, beverage and other packaging segment expanded 5 per cent year-over-year. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $12.67-million, up 6.7 per cent from $11.88-million reported during the same period last year. The EBITDA margin was 14.5 per cent. Distributable cash flow per unit was 73 cents, up from 65 cents reported last year. The company has a healthy balance sheet providing it with the financial flexibility to complete future acquisitions. The unit price increased 1 per cent the following trading day but on low volume.
The Fund is expected to report its fourth-quarter earnings results in early March. Income in the fourth-quarter will be impacted by the loss of large customer, which is expected to lower food and beverage revenue by $1-million.
The Fund did not repurchase any units during the third-quarter but can repurchase up to 500,000 units before March 13, 2020 as part of its normal course issuer bid. Last year, no units were purchased under its previous buyback program that expired on March 13, 2019.
According to Bloomberg, the chief executive officer Gerry Glynn owns over 20 per cent of the units outstanding.
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 3 per cent. The monthly distribution has been maintained at 11 cents per unit since early 2017.
Last quarter, the cash flow payout ratio stood at 45 per cent. For the first nine months of 2019, the payout ratio was 48 per cent, suggesting the distribution is sustainable.
Analysts’ recommendations
The sole analyst that covers this small-cap security with a market capitalization of $475-million is Jim Byrne of Acumen Capital. The Fund is one of Acumen Capital’s top investment ideas for 2020, along with seven other stocks.
Mr. Byrne has a “buy” recommendation and $50 target price, implying the unit price has 11-per-cent upside potential over the next 12 months.
Financial forecasts
Richards Packaging has delivered solid growth over the years. 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 $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 $2.52 in 2018, $2.03 in 2017, $2.02 in 2016, and $1.52 in 2015.
Looking forward, Mr. Byrne is forecasting continued growth for the Fund. He expects revenue will climb to $339-million in 2019 and reach $352-million in 2020. He anticipates adjusted EBITDA will increase to $49-million in 2019 and rise to $52-million the following year.
Valuation
According to Bloomberg, the Fund is trading at an enterprise value-to-EBITDA multiple of 9.9 times the 2020 earnings estimate, down from over 11 times earlier in the year.
Insider transaction history
Over the past year, there has not been any buying or selling activity in the public market reported by insiders.
Chart watch
The recent price weakness may represent a potential buying opportunity. The security is in correction territory with its unit price down 11 per cent from its record closing high of $50 reached on Jan. 13. Furthermore, the relative strength index (RSI) is at 32, suggesting the security is nearing oversold territory. Generally, an RSI reading at or below 30 reflects an oversold condition.
The long-term price chart is impressive with the unit price in a multi-year uptrend. The unit price has delivered double-digit price returns (not including the distribution yield) to investors for years. To illustrate, the calendar 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.
In terms of key technical resistance and support levels, the unit price has initial overhead resistance around $46. After that, there is a major ceiling of resistance around $50 (at its record closing high). Looking at the downside, the unit price has initial technical support around $44. Failing that, there is support between $42 and $43, near its 200-day moving average (at $42.78). Over the years, the unit price has, for the most part, held above its 200-day moving average.
This small-cap security is thinly traded. The three-month historical daily average trading volume is approximately 6,000 units. Consequently, the unit price can be volatile at times.
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.
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.
Jennifer Dowty