Bear Island Efficiencies And Tissue Demand Will Support Stronger Long Term Profitability

Catalysts

About Cascades

Cascades manufactures packaging and tissue products with a focus on cost efficiency and sustainable fiber sourcing.

What are the underlying business or industry changes driving this perspective?

• Continued ramp up at the Bear Island mill toward Greenpac level efficiencies, combined with targeted reductions in chemical and material usage, should lift Packaging segment productivity and support structurally higher EBITDA margins.
• Ongoing profitability initiatives, already contributing roughly $10 million sequentially and targeting a $100 million run rate uplift by the end of 2026, position the company to expand earnings even in a flat demand environment through lower unit operating costs.
• Industry wide focus on recycled content and domestic OCC utilization, alongside Cascades’ disciplined sourcing and quality tracking, should sustain favorable input spreads over time and bolster gross margins as recovered fiber markets rebalance.
• Portfolio optimization through plant closures and asset monetization of up to $120 million by mid 2026, followed by redeployment of capital into higher return mills, is expected to reduce leverage toward 2.5 to 3 times and lower financing expense, supporting net earnings growth.
• Strengthening tissue volumes in both retail and away from home channels, supported by recent investments at Kingsey Falls, Granby and the Pryor mill, should drive higher sales and better mix, improving segment level EBITDA and consolidated revenue resilience.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Cascades's revenue will remain fairly flat over the next 3 years.
• Analysts assume that profit margins will increase from 0.4% today to 16.3% in 3 years time.
• Analysts expect earnings to reach CA$785.7 million (and earnings per share of CA$7.78) by about December 2028, up from CA$20.0 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 2.2x on those 2028 earnings, down from 62.3x today. This future PE is lower than the current PE for the CA Packaging industry at 16.0x.
• Analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.06%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Macroeconomic uncertainty and pressure on North American consumers, especially around key retail periods such as post-Thanksgiving and Christmas, could weaken box shipments and tissue demand more than expected, leading to lower volumes and softer revenue growth over the medium term.
• If recovered fiber availability declines due to lower OCC generation and reduced recycling activity while quality also deteriorates, Cascades could face rising input costs that erode the current benefit from favorable raw material trends and compress gross margins and EBITDA.
• Should the Bear Island mill and other operational excellence initiatives fail to fully achieve targeted efficiency and cost savings, or take longer than the 6 to 24 month window management is planning, the company may not reach its profitability improvement objective of 100 million by 2026, limiting the forecast expansion in EBITDA and net earnings.
• Plant closures, environmental provisions and restructuring charges, such as those related to Niagara Falls and the 2024 Canadian facility, highlight ongoing portfolio rationalization that could expose the company to additional one-time costs or lost contribution from divested assets, which would weigh on net income even as operating performance improves.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CA$13.33 for Cascades based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be CA$4.8 billion, earnings will come to CA$785.7 million, and it would be trading on a PE ratio of 2.2x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of CA$12.31, the analyst price target of CA$13.33 is 7.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.