Shares of Supremex Inc. (SXP-T) are rising after the company reported strong fourth-quarter earnings driven by a recent acquisition and despite what the company described as a “secular decline” in its legacy envelope sales and the effect of the COVID-19 pandemic on its business.
The stock was up by as much as 8.5 per cent to a 52-week high of $2.56 in early trading Thursday before pulling back to around $2.42 midday. Supremex shares have risen 20 per cent in the past five days and 50 per cent in the past three months. The stock has more than doubled since hitting an eight-year low of $1.10 in July.
On Thursday, Montreal-based Supremex, which has also been expanding into paper packaging products, reported total revenue of $54.6-million in the quarter ended Dec. 31, up 11 per cent from $49.2-million the same period in 2019. The expectation, based on an estimate from one analyst that covers the stock, was for revenue to come in at $52.4-million, according to S&P Capital IQ.
The company’s main envelope segment revenue was up 13 per cent to $40.5-million, while its expanding packaging and specialty products segment revenue increased by 5.4 per cent to $14.2-million. The company said revenue from the Canadian envelope market was up 15 per cent year-over-year to $27.5-million, driven by its acquisition of Royal Envelope last year “which more than compensated for the effect of the secular decline on the company’s legacy envelope sales and from the effect of the COVID-19 pandemic on non-essential envelope demand.”
Supremex bought Royal Envelope in Feb. 2020, which is said at the time would “optimize the operations cost-base in Eastern Canada and enhance cash-flow generation capacity, which in turn will provide us with the necessary means and time to continue to diversify into packaging.”
Revenue from the U.S. envelope market rose 9.7 per cent to $13-million in the fourth quarter versus the same period in 2019.
Net earnings were $309,000 or a penny per share for the fourth quarter compared with $2.3-million or 8 cents per share for the same period in 2019. Adjusted net earnings came in at $3.7-million or 13 cents per share versus adjusted net earnings of $2.2-million or 8 cents per share during the fourth quarter of 2019. The expectation was for adjusted earnings of 6 cents per share in the latest quarter.
Revenue for all of 2020 rose 6.7 per cent to $204.6-million, while adjusted earnings came in at $11.3-million or 40 cents per share versus $7.1-million or 25 cents in 2019. The expectation was for revenue of $202-million and earnings of 32 cents.
“We ended the year on very solid ground with revenue and profitability growth from both our envelope and packaging platforms and a significant deleveraging of the balance sheet during the course of the year,” stated Supremex chief executive Stewart Emerson in a release, adding that the acquisition of Royal Envelope “provided important earnings power to our envelope business.” He also said the company’s growing packaging and specialty products segment “performed well on the strength of our e-commerce offering and improved operations... .”
Supremex’s largest shareholder is the Jerry Zucker Revocable Trust, with a 21.4-per-cent stake, according to S&P Capital IQ, followed by Claret Asset Management Corp. with a 10-per-cent stake and Invesco Ltd. with a 4-per-cent stake.
Industrial Alliance Securities analyst Neil Linsdell has a “buy” on the stock” and upgraded his target price to $3.50 from $2.85 after the earnings.
In a note released today, Mr. Lindsell says envelope sales are expected to continue to decline in Canada and the U.S. “although Surpremex has managed to gain market share in the U.S. while benefitting from production efficiencies in Canada as product is shipped across the border. This has allowed Supremex to maintain good margins ... on the envelope side of the business, while it uses these profits to build up the packaging business.”
He noted the company’s goal is to build up its packaging side to represent 50 per cent of business in the next three-to-four years, up from 28 per cent in 2020.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.