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Thursday’s TSX breakouts: A market leader yielding 4.7% with six buy calls

On today's TSX Breakouts report, there are 29 stocks on the positive breakouts list (stocks with positive price momentum), and 17 stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that appears on the positive breakouts list. The company is a market leader delivering solid top-line growth. The company offers investors an attractive 4.7 per cent yield and has a unanimous buy call. The security discussed today is KP Tissue Inc. (KPT-T).

A brief outline is provided below that may serve as a springboard for further fundamental research.

The company

Through its limited partnership interest in Kruger Products L.P., Mississauga-based KP Tissue is involved in the manufacturing and marketing of tissue products, such as bathroom tissues, facial tissues, paper towels and paper napkins under brand names such as Cashmere, Purex, Scotties, White Swan, SpongeTowels, and White Cloud. The company services two market segments - retail consumers (i.e. households) as well as commercial users or the 'away-from-home' (AFH) market (i.e. hotels, restaurants, schools, office buildings, etc.).

According to ACNielsen data, KP Tissue is a market leader, holding the top dollar market share position in Canada within the bathroom tissue segment since the year 2000, the number one position in the facial tissue segment since 2005, and has held the second largest dollar market share position in Canada in the paper towel category since 2004 (Procter & Gamble is currently number one). As at June 24, its market share position for the past year stood at 36.7 per cent in bathroom tissue, 31.8 per cent in facial tissue, and 23.5 per cent in the paper towel category.

The company has eight manufacturing plants, four tissue plants are located in Québec, two facilities are in Ontario, one facility is in B.C., and there is one manufacturing facility in the U.S. (located in Memphis, Tennessee).

Before the market opened on August 9, the company released its second-quarter financial results. Revenue came in at $314-million, up 6.3 per cent year-over year. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $37.3-million, up 3.9 per cent year-over-year, and relatively in-line with the consensus estimate of $37.6-million. The share price was relatively unchanged that day, falling 2 cents to close at $14.28.

The company is anticipated to report its third quarter financial result in early November, and it could be another lacklustre quarter given historically high pulp prices. As well, the company will incur start-up costs from its new paper machine project at its Crabtree mill in Québec. In last quarter's earnings release, the chief executive officer Mario Gosselin indicated that adjusted EBITDA is anticipated to decline year-over-year due to higher pulp prices. The consensus EBITDA estimate is $37.6-million.

However, there is optimism for improving financial results beyond the third quarter. In late July, the company increased its prices to its Canadian retail customers to offset higher costs. The benefit from this price hike is expected to be realized in the fourth quarter. Furthermore, the company should begin to benefit from its new paper machine project in Crabtree by the first quarter of 2018 with a quick ramp up expected.

Later this year, management is expected to announce plans for its next Through-Air-Dried project – TAD2, a new growth opportunity for the company.

Dividend policy

The company pays shareholders a quarterly dividend of 18 cents per share, or 72 cents per share on a yearly basis. This equates to an annualized yield of 4.7 per cent. KP Tissue has maintained its dividend at this level since 2013.

Analysts' recommendationsThere are six firms that provide research coverage on this micro-cap stock with a market capitalization of $140-million. All six analysts have buy recommendations.

The firms providing research coverage on the company are as follows in alphabetical order: CIBC World Markets, Desjardins Securities, National Bank Financial, RBC Capital Markets, Scotia Capital and TD Securities.

Financial forecasts

The consensus EBITDA estimates are $159-million in 2017, increasing 14 per cent to $181-million in 2018. The Street is forecasting earnings per share of 81 cents in 2017 jumping to $1.15 the following year.

Forecasts have been relatively stable over recent months. For instance, three months ago, the Street was forecasting EBITDA of $163-million in 2017 and $180-million in 2018.

Valuation

Analysts commonly value the stock on an enterprise value-to-EBITDA multiple basis.

The one-year consensus target price is $17.17, suggesting there is 13 per cent upside in the share price over the next 12 months. Including the dividend yield, this represents a potential total return of over 16 per cent. Individual target prices are as follows in numerical order: $16, two at $17, two at $17.50, and $18.

Revised recommendations

Last month, two analysts tweaked their target prices – both lower.

Keith Howlett, the analyst from Desjardins Securities and George Doumet from Scotia Capital both lowered their target prices to $17.50 from $18.

Insider transactions

There is a sparse amount of insider transaction activity so far this year. Furthermore, insider transactions that have been reported are relatively small.

The most recent reported transaction in the market reported by an insider occurred in June. On June 7, David Angel, the chief financial officer at Kruger Inc., purchased 700 shares at an average price per share of $15.05, increasing his portfolio's position to 10,700 shares. Prior to that, on March 22, Mr. Angel bought 500 shares at an average cost per share of $15.05, and the previous day, he acquired 1,000 shares.

Chart watch

Year-to-date, the share price is relatively unchanged, down 3 per cent.

Daily average trading volume is low. To illustrate, the three-month historical daily average trading volume is approximately 12,000 shares.

In terms of key resistance and support levels, the stock price is currently near a major overhead resistance level, around its 200-day moving average (at $15.15). The next major ceiling of resistance is around $16. However, failure of the stock price to push higher could led to the share price falling back to around the $14 level, which is near its 50-day moving average (at $14.30).

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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, financial forecasts, 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.

If you want to receive an automatic link to all reports that I write, follow me on Twitter at @jennifer_dowty

Positive BreakoutsSept. 13 close
BLDP-TBallard Power Systems Inc $5.72
BDT-TBird Construction Inc $9.54
CFW-TCalfrac Well Services Ltd $4.31
CWB-TCanadian Western Bank $31.06
CFP-TCanfor Corp $22.63
CJT-TCargojet Inc $51.06
CVE-TCenovus Energy Inc $10.98
CHR-TChorus Aviation Inc $8.41
DIV-TDiversified Royalty Corp $2.91
DC.A-TDundee Corp $3.00
ET-TEvertz Technologies Ltd $18.62
FRU-TFreehold Royalties Ltd $14.38
ITX-TIntertain Group Ltd $12.13
KPT-TKP Tissue Inc $15.24
MTL-TMullen Group Ltd $16.34
NA-TNational Bank of Canada $57.82
NVA-TNuVista Energy Ltd $7.19
POU-TParamount Resources Ltd $23.07
PSK-TPrairieSky Royalty Ltd $31.29
RIC-TRichmont Mines Inc $12.40
SMU.UN-TSummit Industrial Income REIT $7.47
TVE-TTamarack Valley Energy Ltd. $2.64
TCL.A-TTranscontinental Inc $26.99
TFII-TTransForce Inc $30.93
TCW-TTrican Well Service Ltd $3.88
TET-TTrilogy Energy Corp $6.16
VET-TVermilion Energy Inc $43.90
WEF-TWestern Forest Products Inc $2.73
Y-TYellow Pages Ltd $8.16
Negative Breakouts
ALC-TAlgoma Central Corp $11.54
ACO.X-TAtco Ltd $44.79
BEI.UN-TBoardwalk Real Estate Investment Trust $39.03
CNR-TCanadian National Railway Co $98.06
CARA-TCara Operations Ltd $21.44
CIGI-TColliers International Group Inc $61.17
CRR.UN-TCrombie Real Estate Investment Trust $13.29
FSV-TFirstService Corp $79.27
WN-TGeorge Weston Ltd $105.11
GRT.UN-TGranite Real Estate Investment Trust $49.14
MDI-TMajor Drilling Group International Inc $7.02
NAL-TNewalta Corp $0.70
REI.UN-TRioCan Real Estate Investment Trust $23.66
SJR.B-TShaw Communications Inc $27.51
TA-TTransAlta Corp $7.50
UNS-TUni-Select Inc $26.14
VLN-TVelan Inc $17.10

Source: Bloomberg

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