Kalkine has a fully transformed New Avatar.

US Equities Report

Reynolds Consumer Products Inc.

Jul 22, 2021

REYN
Investment Type
Mid - Cap
Risk Level
Action
Rec. Price ($)

 

Company Overview 

Headquartered in Lake Forest, Illinois, Reynolds Consumer Products Inc. (NASDAQ: REYN) is a leading consumer products company with a presence in 95% of U.S. households. The company was incorporated in September 2011 and is currently focused on producing and selling products across three broad categories, i.e., cooking products, waste & storage products, and tableware. REYN was listed on the NASDAQ on January 31, 2020.

REYN Details

Revenue Segments & Organic Growth Initiatives

Reynolds Consumer Products Inc. (NASDAQ: REYN) generates revenue from four segments, including 1) Reynolds Cooking & Baking, 2) Hefty Waste & Storage, 3) Hefty Tableware, and 4) Presto Products, focused on the sale of food storage bags, trash bags, reusable storage containers, and plastic wrap. Its general product portfolio comprises aluminium foil, wraps, disposable bakeware, trash bags, food storage bags, disposable tableware, among others.

On May 18, 2021, the company launched the Reynolds Kitchens Pink Butcher Paper with Slide Cutter across the United States. The new premium-quality butcher paper is FDA-compliant and is designed to protect the crisp bark of smoked meats while still keeping them tender and juicy on the inside.

It’s also worth noting that during Q1FY21 (ended March 31, 2021), the company increased the distribution of various new products in its Reynolds Cooking & Baking, Hefty Tableware, Presto Products segments, which contributed to solid sales growth despite the obstacles in the form of February storms (dubbed Winter Storm Uri) and unprecedented commodity price hikes. It also increased its prices across its Hefty Waste & Storage Segment portfolio and realized a 1% increase in net revenues from the segment YoY.

Q1FY21 Key Results Highlights

During Q1FY21 (ended March 31, 2021), REYN reported earnings of USD 0.35 per share, representing a 150.0% YoY increase. Revenue increased by 3.7% to USD 757 million from USD 730 million in Q1FY20. Revenue from the Reynolds Cooking & Baking segment increased by 11.9% to USD 272 million in Q1FY21 vs. USD 243 million in Q1FY20, driven by increases in both sales price and volume. Net income for Q1FY21 was USD 74 million, 2.8x compared to USD 26 million in Q1FY20. Adjusted EBITDA for Q1FY21 amounted to USD 140 million vs. USD 135 million in Q1FY20.

Revenue & Gross Profit; Analysis by Kalkine Group

Key Metrics, Liquidity & Balance Sheet Details

The company exited the quarter with a cash balance of USD 144 million. Its property, plant & equipment (net of accumulated depreciation) were reduced by USD 1 million to USD 611 million from USD 612 million reported at FY20 end. Total debt stood at USD 2.13 billion as of March 31, 2021. The company generated USD 9 million from cash flow from operating activities during Q1FY21.

In Q1FY21, the EBITDA margin stood at 18.5%, higher than the year-ago figure of 17.8%. Operating and net margins were 14.7% and 12.8%, compared to the year-ago figures of 12.6% and 6.7%, respectively. Debt/Equity of the company was 1.29x as of March 31, 2021, vs. 1.79x as of March 31, 2020.

Profitability and Leverage Profile; Analysis by Kalkine Group 

Top 10 Shareholders

The top 10 shareholders together form around 92.71% of the total shareholding, with Packaging Finance Ltd. accounting for the maximum holding at 74.11%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

Some of REYN’s products are manufactured at a single location. As a result, the loss of the use (whole or in part) of any of its key manufacturing facilities could have a material adverse effect on its business. In addition, the company generates a considerable amount of revenues from a small group of customers. For example, in FY20, it generated 68% of its total revenue from its top ten customers. The top two (Walmart and Sam's Club) accounted for 30% and 13%, respectively, of the total revenue. Hence, the loss of any of these significant customers could be detrimental to the firm's financial condition. Also, the company operates in highly competitive markets. If the company’s products fail to compete successfully with other branded or private label offerings in terms of quality, pricing, and innovations, it could negatively impact sales and profitability. Moreover, the company stated that, over the last few years, it has noted that specific parts/ segments of its business have been moderately seasonal and that it generates the most and least revenue in Q4 and Q1, respectively.

Outlook

For FY21, REYN expects the net revenues to grow in high single digits on a base of USD 3.26 billion in the previous year. It forecasts an adjusted EBITDA of USD 670 - 700 million. Net income is estimated to be in the range of USD 372 - 395 million, implying an EPS range of USD 1.77 – 1.88 per share. Its net debt is expected to reduce to ~USD 1.8 billion on December 31, 2021 (from USD 1.98 billion as of March 31, 2021). For Q2FY21, REYN’s adjusted EBITDA is expected to range between USD 140 - 150 million, with an estimated net income of USD 73 - 80 million. EPS forecast is USD 0.35 - 0.38 per share.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation 

Over the last 12 months, REYN has corrected ~13.45%. The stock is currently quoting close to the lower band of its 52-weeks trading range of USD 27.27 to USD 35.70. We have valued the stock using the Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price with an upside of high teens (in percentage terms). We believe that the company can trade at a discount compared to its peer’s average, considering the risks involved with its limited manufacturing facilities, competition from peers, dependence on certain major customers, and seasonality of the business. We have taken peers like Kimberly-Clark Corporation (NYSE: KMB), Spectrum Brands Holdings, Inc. (NYSE: SPB), among others. Considering the company’s decent Q1FY21 performance, growth initiatives, expansion of product distributions, market share, current trading levels, and valuation, we give a “Buy” recommendation on the stock at the closing price of USD 28.77 down ~1.17% as of July 21, 2021.

REYN Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.


Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine do not hold interests in any of the securities or other financial products covered on the Kalkine website.