IBC analyst says this consumer goods stock in the packaging and containers industry is the best packaging stock to weather the transition from single-use plastics.
When the federal government reiterated its intention to achieve zero plastic waste in Canada by 2030 in an Oct. 7 statement, many might have interpreted the announcement as a bad omen for plastics packaging companies, but analyst Scott Fromson takes a more optimistic tack.
Mr. Fromson describes a move toward sustainability as a promising long-term investment driver and a way for companies to distinguish themselves.
Based in Toronto, Mr. Fromson is an equity analyst for CIBC World Markets, where he currently covers diversified industries and was previously responsible for portfolio strategy. Earlier in his career, he also worked for major institutions such as Credit Suisse, BMO Capital Markets, and HSBC Securities.
Single-use plastics targeted by CEPA
“One item that stood out is the proposed addition of ‘plastic manufactured items’ to the list of toxic substances under the Canadian Environmental Protection Act. We see this as a step to eliminating single-use plastic items, as opposed to all plastic packaging,” he explains of CIBC’s interpretation of the federal statement.
Indeed, the statement declared: “A key part of the plan is a ban on harmful single-use plastic items where there is evidence that they are found in the environment, are often not recycled, and have readily available alternatives.
“Based on those criteria, the six items the government proposes to ban are plastic checkout bags, straws, stir sticks, six-pack rings, cutlery and food-ware made from hard-to-recycle plates.”
Mr. Fromson says, “While the toxic-substances classification is not good for sentiment in the short term, we see minimal impact on Canadian-listed names.”
Factors supporting plastic packaging
The analyst notes that domestic packaging producers are mainly tied to other forms of plastic.
“Canadian packaging names are mostly exposed to packaging for extended-use, perishable food, beverage, and pharma or health-care products. Usage reduction for these products will be more difficult, playing out over a longer time frame. Major factors that support continued plastic packaging usage are limitations of alternative structure materials or formats, along with superior product protection, quality assurance, and safety. These feature are crucial to reducing the roughly 30 per cent to 40 per cent of food that goes to waste, and thus methane-emitting landfills.”
Speaking to the feasibility of the government’s plan, the analyst remarks, “We are neither comfortable nor qualified to opine on whether the 2030 zero-plastic-waste goal is attainable. However, we do envision numerous challenges to its achievement.”
Among the possible obstacles that he cites are regulatory and food safety issues, the degree of required additional investment in recycling infrastructure, and the ambiguous categorization of targeted plastic packaging products and end uses.
Sustainability is a key factor
That said, Mr. Fromson stresses, “Sustainability aligns with best practices for quality plastic packaging producers.”
Accordingly, the analyst selects Winpak Ltd. (TSX—WPK) as the best packaging stock to weather the transition. “Winpak stands out among our coverage universe—sustainability is a key driver of product development and growth,” he says.
On a potentially brighter note, the federal government’s statement noted, “This plan also proposes improvements to recover and recycle plastic, so it stays in our economy and out of the environment. The government is proposing to establish recycled content requirements in products and packaging. This will drive investment in recycling infrastructure and spur innovation in technology and product design to extend the life of plastic materials.”
Mr. Fromson asserts, “Winpak’s expertise in product R&D, materials engineering and manufacturing technology forms the basis of its competitive advantage. This comes through in its high EBITDA (earnings before interest, taxes, depreciation and amortization) margins of 21 per cent to 23 per cent versus the industry average of 15 per cent to 16 per cent.
Elaborating further, the analyst points to some of the company’s recycling-ready products, including flexible pouches, protein trays, spouted pouches, and single-polymer in-mold label containers.
The Ellen MacArthur Foundation has been leading the charge toward a “circular economy”, one in which growth (including economically) does not rely on the consumption of finite resources.
Although Winpak is not part of the foundation’s member network yet, as it has not signed Ellen MacArthur’s New Plastics Economy Global Commitment, signatories include major retailers, consumer product brand owners, recyclers, governments, investors, raw materials suppliers, and other packaging producers. “We think this exemplifies the widespread sustainability support from mainstream players,” says Mr. Fromson.
This is an edited version of an article that was originally published for subscribers in the October 30, 2020, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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Investor's Digest of Canada •12/30/20 •