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On today’s TSX Breakouts report, there are 37 stocks on the positive breakouts list (stocks with positive price momentum), and nine stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a security that has seen its revenue jump on the back of spiking sales of hand sanitizers and disinfectants during the coronavirus pandemic. On June 22, the unit price rallied to a record closing high. The unit price is up 40 per cent year-to-date and is a few percentage points away from resurfacing on the positive breakouts list. The security has a conservative payout ratio allowing it to provide investors with a stable monthly distribution, currently equating to an annualized yield of 2 per cent. Longer-term investors have been rewarded with this security delivering double-digit returns for years: 30 per cent in 2019, 12 per cent in 2018, 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 its valuation, the security is not cheap. Consequently, investors may wish to wait for a pullback to accumulate units. 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.

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The Fund

Mississauga, Ontario-based Richards Packaging is top packaging distributor in Canada and North America’s third largest packaging distributor. Richards Packaging has sales and distribution centres, and manufacturing plants located across North America.

In terms of geographic sales exposure, 65 per cent of total revenue is from the U.S., and the balance, 35 per cent, is from Canada. More specifically, approximately 52 per cent of sales are derived from three U.S. cities (Los Angeles, Reno and Portland) and 32 per cent of sales are from four Canadian cities (Toronto, Montréal, Winnipeg and Vancouver). 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 over 14,300 companies in various industries. According to the 2019 annual report, the food and beverage and other packaging industry represented 47 per cent of revenue. The cosmetics industry accounted for 30 per cent of revenue, and the healthcare industry represented 23 per cent of revenue.

On May 4, the Fund reported stellar financial results for the first-quarter with strong demand hand sanitizers and disinfectants boosting its cosmetics packaging revenue. In addition, favourable foreign exchange conversion rate with the Canadian dollar falling 1.4 cents relative to the U.S. dollar boosted earnings. Revenue came in at $108.9-million, up 33 per cent year-over-year (24.9-per-cent organic growth). Growth was evident across its business segments, but the stand-out came from the cosmetics segment. Revenue from cosmetics increased 86 per cent year-over-year. The healthcare segment saw its revenue climb 15.4 per cent. Finally, revenue from the food, beverage and other packaging segment expanded 5.9 per cent year-over-year. Resin prices can impact costs for packaging companies; however, Richards passes price increases or decreases along to its customers. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $19.3-million, up 64 per cent from $11.77-million reported during the same period last year. The EBITDA margin was 17.7 per cent, compared to 14.4 per cent reported last year. Distributable cash flow per unit was $1.04, up from 66.5 cents reported last year. The unit price jumped nearly 8 per cent the following trading day.

Looking ahead, in the MD&A (Management’s Discussion and Analysis), management provided positive data for the first month of the second quarter stating, “Second quarter revenue for April continues to grow at double digits on coronavirus related demand and the exchange translation at the current exchange rate of U.S./Cdn. 70 cents has weakened 4 cents over the same period in 2019. The current sensitivity for every one cent movement in exchange rates to revenue is $0.7-million and to adjusted EBITDA is $0.07-million.” However, the Canadian dollar rebounded relative to the U.S. dollar in late May and closed out the quarter above 73 cents. Later this month, the Fund is expected to report its earnings results for the quarter ended June 30.

On June 1, the company announced a $64-million acquisition, acquiring Clarion Medical Technologies. Based in Ontario, Clarion provides medical and aesthetic products and services including laser technologies, diagnostic equipment, and skincare to hospitals, clinics, and private practices. The chief executive officer Gerry Glynn remarked, “”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.” Management added, “It is unclear whether the acquisition will be accretive to earnings in 2020”.

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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 2 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 32 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 $685-million is only covered by one analyst - Jim Byrne, the analyst at Acumen Capital. Mr. Byrne has a ‘buy’ recommendation and $66 target price, implying the Fund is nearly fully valued.

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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, analyst Jim Byrne is forecasting continued growth for the Fund. He anticipated revenue will climb to $400.8-million in 2020 and reach $441-million in 2021. He expects adjusted EBITDA will increase to $62.3-million in 2020 and rise to $65.3-million the following year.

Valuation

According to Bloomberg, the Fund is trading at an enterprise value-to-EBITDA multiple of 11.3 times the 2021 earnings estimate, near its peak multiple.

Insider transaction history

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

Chart watch

Year-to-date, the unit price has rallied 40 per cent. However, in recent weeks, the unit price has been consolidated, trading sideways, largely between $62 and $65.

On a longer-term basis, the price action is impressive. This security 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 $66, close its record closing high of $66.19 reached on June 22. After that, there is resistance around $70. Looking at the downside, the unit price has strong technical support between $58 and $60, close to its 50-day moving average (at $57.82).

This small-cap security is thinly traded. The three-month historical daily average trading volume is approximately 15,000 units.

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Positive BreakoutsJuly 14 close
ABT-TAbsolute Software Corp $14.66
AGI-TAlamos Gold Inc $14.15
ACO-X-TAtco Ltd $42.27
BTO-TB2Gold Corp $8.20
GBT-TBMTC Group Inc $9.08
BLX-TBoralex Inc $33.89
BRE-TBridgemarq Real Estate Services $12.35
CNR-TCanadian National Railway Co $125.06
CFP-TCanfor Corp $14.32
CWX-TCanWel Building Materials Group Ltd. $5.02
CAS-TCascades Inc $15.69
ELD-TEldorado Gold Corp $15.23
EDR-TEndeavour Silver Corp $3.83
EXF-TEXFO Inc $4.98
FAH-UN-TFairfax Africa Holdings Corp. $3.85
FM-TFirst Quantum Minerals Ltd $13.97
FVI-TFortuna Silver Mines Inc $6.96
GTII-TGreen Thumb Industries Inc. $15.65
HDI-THardwoods Distribution Inc $18.27
H-THydro One Ltd. $26.91
IMV-TIMV Inc. $6.35
ISV-TInformation Services Corp. $16.01
INE-TInnergex Renewable Energy Inc $20.12
IFP-TInterfor Corp $13.69
ITP-TIntertape Polymer Group Inc $13.83
KPT-TKP Tissue Inc $11.28
LIF-TLabrador Iron Ore Royalty Corp $26.27
OSB-TNorbord Inc $37.51
NPI-TNorthland Power Inc $34.97
PAAS-TPan American Silver Corp $44.94
RCH-TRichelieu Hardware Ltd $31.60
SVM-TSilvercorp Metals Inc $8.20
SII-TSprott Inc $52.25
TFII-TTFI International Inc. $53.23
WCN-TWaste Connections Inc. $133.84
WDO-TWesdome Gold Mines Ltd. $13.77
WFT-TWest Fraser Timber Co Ltd $55.92
NEGATIVE BREAKOUTS
APS-TAptose Biosciences Inc $7.76
AUP-TAurinia Pharmaceuticals Inc $19.75
BLU-TBELLUS Health Inc. $3.41
CWEB-TCharlotte's Web Holdings Inc. $4.76
CGX-TCineplex Inc $7.80
CJR-B-TCorus Entertainment Inc $2.40
HLS-THLS Therapeutics Inc. $16.25
MI-UN-TMinto Apartment REIT $18.86
TRZ-TTransat AT Inc $5.08

Source: Bloomberg

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, 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 indices 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.

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.

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