Intertape Polymer Group Will Be Tested, Will The Dividend Growth …

Intertape Polymer Group is a leading developer and marketer of packaging and protective solutions for industrial and retail use. The company provides a variety of paper and film-based pressure-sensitive and water-activated tapes, polyethylene and specialized polyolefin films, protective packaging, and engineered coated products. 

The company has operations in 31 locations, including 22 manufacturing facilities in North America, four in Asia and one in Europe. Over the years, Intertape Polymer has built extensive manufacturing and research and development facilities that develop a comprehensive range of packaging, protective and industrial product solutions. 

Intertape Polymer serves a wide spectrum of end markets ranging from food processing, general manufacturing to transportation, construction, oil and gas, agriculture, and aerospace, marine and medical applications. The company provides a broad range of products ranging from carton sealing machines, flatback tape, and duct tape, to roof underlayment, stretch films and water-activated tapes. Intertape’s product bundle can be broadly classified into tapes (58%), films (16%), protective packaging (12%), and woven (14%). It is focusing on strengthening its product portfolio, expanding its global footprint, providing protective solutions and driving operational efficiency for future growth.

Investment Data

Revenue Growth & Market Exposure

Intertape Polymer has built a huge product portfolio given its manufacturing expertise, technologies, and extensive R&D activities. Its global sourcing expertise and impressive product line allow it to cater to the customized needs of a huge base of customers in varied industries. A broad and comprehensive range of packaging, protective and industrial product solutions is Intertapes’ key competitive advantage and offers good opportunities to cross-sell. Customers also prefer Intertape for its low-cost structure. 

Intertape has been growing both organically and through acquisitions and has a sound track record of successful integrations. The newest acquisition of Nortech is expected to expand the company’s product portfolio into automation in packaging. The company grew its revenues by 10% last year, driven by acquisitions and investments in key categories such as water-activated tape and films. Margins too improved. Intertape is also positioning itself to offer comprehensive solutions to distributors and e-commerce retailers that are utilizing automation to streamline their operations. Intertape’s scale and customer relations have the potential to open up new opportunities in different verticals in this area. Moreover, packaging requirements continue to evolve as large e-commerce players commit to improving the packaging standards to reduce waste and improve sustainability. The company is in a good position to benefit from its leading position in the packaging industry driven by a growing global footprint and improving operational excellence. 

Intertape has revised its revenue outlook to $1,135 – $1,200 million for the full year as a result of COVID-19 impact. It is possible that Intertape could witness higher than expected e-commerce growth in 2020 from products such as water-activated tape and protective packaging. The company may also experience headwinds as a result of reduced demand in industrial tape and woven products as well as supply chain disruptions as a result of COVID-19. 

Dividends

Intertape Polymer is a Canadian Dividend Aristocrat. It has a dividend yield of ~6% and a high payout ratio of 84%. The company last raised its dividend by more than 5% and has compounded its dividend growth by an impressive 18.5% per annum over the last five years. The company continued to pay dividends even during trying times and maintained a consistent average payout of over 3% over the last decade.

Intertape is expecting good returns (15% IRR) from its Capex incurred during the last three years. Intertape is generating a growing stream of cash flow. With the completion of the strategic CapEx program in 2018, almost five times more free cash flow was generated last year versus 2018 which enabled the company to bring down its total leverage to lower than three times at the end of 2019.  Free cash flows for 2020 are expected to be between $90 and $110 million, representing growth of more than 15% at the midpoint of the range. Intertape has significantly reduced its total capital expenditures for 2020 to $30 – $40 million as a result of COVID-19 impact. 

Intertapes’ solid turnaround since 2011, recovering from the status of a struggling company to reaching impressive double-digit earnings margins is impressive and indicates the resilience of its management team. The company will now be in a good position to repay its debt as its capital expenditure program returns to a more normal level. Intertape should also gain from the cost synergies as a result of Polyair, Maiweave, and Airtrax acquisitions. The acquisition of Nortech is expected to be accretive to net earnings in 2020 while the Polyair acquisition has expanded Intertape’s product bundle targeting e-commerce. Intertape is positioning itself better to ensure effective service to e-commerce customers and meet their packaging needs. The company anticipates ~$3 – $4 million in M&A integration costs during 2020. Capital investments and acquisitions strengthen Intertape’s footing for future success.

Competition

The label market is large and highly fragmented but has no single large player. CCL Industries Inc. is Intertapes’ prominent competition. CCL Industries is the clear leader given its huge scale of operations and global reach. Winpak Ltd., IPL Plastics, Richards Packaging are other big competitors. A solutions-oriented approach to address specific end-user needs differentiates Intertape Polymer from its competitors. Low-cost leading asset base, a strong product portfolio, and scale are its other competitive advantages.

Bottom Line

Intertape should continue to improve its top-line growth on the back of large capital expenditure on strengthening its facilities, enhancing its product portfolio and strong acquisitions. Intertape is also favourably placed to gain from an increasing demand from e-commerce customers in the tough times. The e-commerce market continues to grow at double-digit rates exceeding the conventional brick-and-mortar retail market. As the pace of capital expenses slows down, Intertape should start benefiting from improving operational efficiencies and cash flows. The company’s focus on strengthening its product bundling and operational excellence should hep it solidify its position as a global leader in packaging and protective solutions.