3 Smaller Canadian Stocks Worth a Closer Look: Supremex

By Will Ashworth

• Supremex (TSX:SXP) has been public since 2006. 

• Its stock has been pummelled in 2023.

• It’s a dull but undervalued business.

I’m wrapping up the first week in November with the last in a series about three smaller Canadian stocks that I’m putting on my watchlist for possible inclusion in my Canadian Investor portfolio. 

These stocks trade on the TSX or TSX Venture and have market caps between $100 million and $400 million. Monday, I covered Yerbaé Brands (TSXV:YERB.U), an Arizona-based company that makes a healthy caffeine-infused sparkling water product. I’ll continue to watch its progress. 

On Wednesday, I wrote about Diversified Royalty (TSX:DIV), a Vancouver-based company with a $350 million market cap, a troubled past, but a gleaming future. 

Today, it is Supremex (TSX:SXP, OTCMKTS:SUMXF), a Quebec-based company with a $109 million market cap and operating an old-time business. 

Who Is Supremex?

I’m not sure why, but its corporate name makes me think it’s a cannabis company rather than a manufacturer of envelopes, labels, and paper-based packaging. 

The company has 13 facilities in seven provinces and six facilities in the U.S. Supremex started in 1977, went public in 2006, and has been acquiring strategic businesses ever since.   

What interests me about Supremex is how far its stock has fallen in 2023. Its shares are down more than 28% year-to-date and nearly 16% over the past year. The last time it traded this low was September 2022. 

There’s an opportunity for it to return to the $7s where it traded earlier this year. 

What happened to its share price? Lower earnings happened. 

Transitory Time

The company reported its Q2 2023 results in August. While revenues were 14.6% higher, its adjusted net earnings were down 69% over last year. 

Supremex’s packaging business was busy merging its folding carton activities under one roof in Lachine, Quebec, while also integrating two acquisitions, which led to higher costs during the quarter. 

Management believes that profit reduction in the second quarter is transitory. The folding carton business will be better equipped to meet customer orders in the future. Profits should improve in coming quarters.

We’ll get a better sense next week, when the company announces Q3 results ahead of Nov. 9 trading.  Analysts expect earnings per share of 16 cents on revenue of $57.2 million, according to data compiled by S&P Capital IQ.

As part of its optimization plan for its Packaging and Specialty Products segment, the company recently closed a plant in Saint-Hyacinthe that it inherited as part of its $26.6 million acquisition of Impression Paragraph earlier in 2023. Impression provides paper-based point-of-sale displays in the cosmetic, pharmaceutical, food, confectionery, and retail sectors. 

Supremex expects its optimization plan will save the company $1.5 million annually once completed. It took a one-time $2.8 million restructuring charge to close the Saint-Hyacinthe facility.

To improve the communication between CEO Stewart Emerson and the Packaging and Specialty Products division, the company created three general manager positions to oversee its folding carton, e-commerce, and commercial printing activities. They report directly to Emerson. The division’s president, Simon Provencher, stepped down from his position.

What’s Fair Value?

The Globe and Mail recently included Supremex in a list of 10 undervalued consumer cyclicals trading on the TSX. It used Stockcalc, a company specializing in fundamental valuations of North American stocks, to screen for value. Stockcalc estimates the fair value of its shares at $7.02 a share. 

According to S&P Global Market Intelligence data, Supremex’s enterprise value is $221.9 million, 3.8x EBITDA (earnings before interest, taxes, depreciation and amortization). 

By comparison, Cascades (TSX:CAS), which competes in some of the same markets as the company, has an EV/EBITDA ratio of 6.5, 71% higher. Assigning the same multiple, Supremex would have an EV of $344 million [$52.9M EBITDA x 6.5], a market cap of $232 million [$344M - debt $113M + cash $1M], and a $8.92 share price [26.0M shares o/s],  or 106% higher than where it’s currently trading.

It yields 3.3%. Get paid to wait for its stock to return to the $7s or even higher. 

I’ll keep an eye on Supremex. I suggest you do the same if value plays are your thing.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. None of the above should be construed as investment or financial advice. Investing is inherently risky. Please perform your own due diligence.

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