Intertape Polymer Group Inc. ITP
August 13, 2014 - 10:19am EST by
andrew152
2014 2015
Price: 13.90 EPS $1.21 $0.00
Shares Out. (in M): 61 P/E 8.1x 0.0x
Market Cap (in $M): 854 P/FCF 30.3x 0.0x
Net Debt (in $M): 162 EBIT 112 0
TEV ($): 998 TEV/EBIT 8.8x 0.0x

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  • Canada
  • Deleveraging
  • Discount to Peers
  • Dividend

Description

InterTape Polymer Group (TSX: ITP)

 

Price: $13.90                                                Revenue (M): $854

High-Low: $15.62 - $11.12                          EBITDA (M): $112

Mkt Cap (M): $854                                            Debt (M): $162

EV: $998                                                           EV/Revenue: 1.2x

Shares (M): 61                                                  EV/EBITDA: 8.8x

Volume (M): 0.2                                                        P/EPS: 8.1x

Yield: 3.7%                                                                 P/FCF: 30.3x

 

Highlights

  • ·         Trading at a 60% discount to peer group based on P/E and a 26% discount based on DCF
  • ·         Aggressive optimization and R&D increased EPS from $0.22/share in 2011 to an expected $1.21/share in 2014
  • ·         Increased dividend by 50% with the potential for further dividend increases
  • ·         Stability, strong management and profitability all point to a higher stock price within the year

 

Overview

Intertape Polymer Group Inc. is a recognized leader in the development, manufacture and sale of a variety of paper and film based pressure sensitive and water activated tapes, polyethylene and specialized polyolefin films, woven coated fabrics and complementary packaging systems for industrial and retail use. Headquartered in Montreal, Quebec and Sarasota, Florida, the Company employs approximately 1,850 employees with operations in 16 locations, including 10 manufacturing facilities in North America and one in Europe.

 ITP products serve a variety of functions and service numerous sectors include Aerospace, Appliances, Automotive, Construction, Food processing, Heating, Marine, Packaging, Transportation and Painting. ITP has been a recognized leader in the packaging industry. The company offers products including industrial tapes, shrink film, protective packaging products and complimentary packaging systems for industrial use in support of the packaging industry. IPG offers a complete line of products specifically engineered to meet construction requirements. These include cloth tapes, high performance building wraps, window flashings and vapor barriers. ITP has been servicing the transportation market for over fifty years with two core products masking tapes and masking films. Intertape Polymer Group has been enhancing existing products and introducing new ones.  In 2009, the company began to focus on developing new higher margin products, which has led to a dramatic increase in margins over the last five years.

 

Q2 2014 Quarterly Earnings Highlights

  • ·         Revenue was $202.9 million up 4.9% from Q2 2013.
  • ·         A higher gross profit translated to a 4.1% increase in EBITDA growth since Q2 2013.
  • ·         CapEx higher than expected due to production startup issues. Total updating of the South Carolina Project will cost $54 million and should be finished in H1 2015.
  • ·         Annualized dividend increased by 50% from 0.32 to $0.48 per share.
  • ·         On July 7, 2014 the company announced a normal course issuer bid (NCIB) of 2 million shares.

  

Focus on Improving Operating Efficiency and reducing manufacturing costs

The company has invested heavily in new plant and equipment and manufacturing cost reduction. The relocation of Columbia, South Carolina duct and masking tape manufacturing facility to a new state-of-the-art facility in Blythewood, South Carolina is almost complete. The investment saved $30 million in the last two years and should save $15 million in 2015. Besides, the company also invests considerably in R&D to introduce new products. By 2014, the new products will constitute around 20% of the total revenue from an 11% contribution in 2011.

 Due to this ongoing investment margins and EPS have increased significantly, despite the revenue remaining constant. The changes are permanent and will benefit the company going forward. The company targets to achieve 24% gross profit margin in the next two years.

 

Declining debt, interest coverage ratio and debt to TTM adjusted EBITDA indicates declining business risk of the company

The company is continuously redeeming the debt outstanding, optimizing its capital structure. the “debt to TTM adjusted EBITDA” ratio of the company declined sharply from 5.1x in 1Q2011 to 1.4x in 1Q2014. With the combined effects of declining debt and the reduced interest rate on outstanding debts the interest coverage ratio shrank to 3% in 2Q2014 from 25% in 2011.

 Trading at a discount

As seen in Table 1, InterTape Polymer Group Inc. is trading at a discount on an EV/EBITDA and P/E basis. Over the last two years the company focused on updating their operations, resulting in dramatically better EPS but also high P/FCF. This should be completed in the first half of 2015. CapEx was about 5% of revenue starting in the second half of 2015, this should revert back to the long run average of about 1%. Based on FCF of $147 million, P/FCF would be 5.6x, well below the industry average.

 

Name

EV/EBITDA

P/E

P/FCF

Aptargroup Inc

9.4x

21.5x

39.0x

Bemis Company

8.9x

16.7x

21.8x

Cascades Inc

6.6x

18.8x

10.3x

Crown Holdings Inc

11.1x

14.2x

8.7x

Intertape Polymer Group Inc

8.6x

7.0x

30.3x

Myers Industries Inc

11.4x

24.0x

33.8x

Silgan Holdings Inc

9.7x

17.0x

13.2x

Sonoco Products Co

8.2x

16.7x

21.7x

Winpak Ltd

12.0x

23.1x

33.7x

Average

9.6x

17.7x

23.6x

Premium/Discount

-10.0%

-60.2%

28.3%

InterTape Polymer Group also trades at a discount to its intrinsic value as seen by the DCF model in table 2. If revenue is held consistent over the next five years ITP’s implied equity value is $1.1 billion or $17.53 a share. The 8x EBITDA multiple used is below ITP’s current multiple and far below the industry average.

             

Valuation

 

2014E

2015E

2016E

2017E

2018E

Revenue

 

$812,760

$812,760

$812,760

$812,760

$812,760

EBITDA Margin

14%

15%

16%

17%

18%

EBITDA

 

$113,786

$121,914

$130,042

$138,169

$146,297

Depreciation

$29,410

$29,410

$29,410

$29,410

$29,410

Tax

 

$10,293

$10,293

$10,293

$10,293

$10,293

WC % of Revenue

16%

16%

16%

16%

16%

WC

 

$154,933

$132,069

$132,069

$132,069

$132,069

Change in WC

$33,694

-$22,864

$0

$0

$0

Capital Expenditure

$42,000

$8,128

$8,128

$8,128

$8,128

FCF

 

$48,386

$146,943

$132,207

$140,335

$148,463

EV

         

$1,170,374

Total

 

$48,386

$146,943

$132,207

$140,335

$1,318,837

PV

 

$46,134

$127,368

$104,177

$100,529

$858,863

             

Inputs

 

 

 

Valuation

 

Discount rate

10%

 

Equity Value

$1,096,571

Tax Rate

 

35%

 

Share Price

$17.53

Terminal EV/EBITDA

8x

 

Upside

 

28%

             

 

Discount Rate

Exit EV/EBITDA

17.53

8%

10%

12%

14%

16%

5x

$13.99

$12.96

$12.01

$11.15

$10.36

6x

$15.65

$14.48

$13.42

$12.44

$11.55

7x

$17.30

$16.00

$14.82

$13.74

$12.75

8x

$18.96

$17.53

$16.22

$15.04

$13.95

9x

$20.61

$19.05

$17.63

$16.33

$15.15

 

Conclusion

Given the strong fundamentals, increased dividend and conservative management ITP looks attractive as a stable dividend play. Capital gains could be realized if the market re-evaluates ITP’s price in line with the peer group. Given the trend in increasing earnings one could expect another dividend increase in 2015.

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

New and improved facility will increase efficiency and will result in better productivity and higher margins
Introduction of new products will lead to higher margins and better EPS
Capex is expected to return to the mean as percentage of revenue in the range of 1%-2% of revenue. This will result in significantly enhanced FCF. 2015 P/FCF is expected to be less than 6, a significant discount to the peer group.
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