Analysts at one of the brokers behind IPL Plastics’ recent Canadian flotation have highlighted near-term concerns about the Dublin-based company’s valuation and an evolving global “blacklash against plastics” as they published their first research report on the stock.
Initiating coverage of the stock with a "market perform" rating – the equivalent of "hold" – BMO Capital Markets analysts led by Mark Wilde said their main issue with IPL is that the stock "is fully valued" compared with peers and that high costs for resin, a key raw material, and transport will create "near-term headwinds" for the company.
BMO said the most compelling argument to own IPL shares is the company's strong growth potential. However, while the company, led by chief executive Alan Walsh, plans to invest $120 million by the end of the decade on capital expenditure to increase its manufacturing capacity, mainly in North America, this will drag on the company's free cash flow.
IPL, which makes everything from ice cream cartons to refuse banks and derives most of its earnings in North America, raised $178 million Canadian (€115.6 million) last month through its initial public offering and Toronto flotation. The shares were priced at the bottom end of a previously indicated range of $13.50-$16 each, mainly as a result of weakness across its main publicly quoted peers.
IPL was advised on the deal by three Canadian brokerages, BMO, CIBC and Royal Bank of Canada.
BMO noted that mounting pressure internationally, especially in Europe, for use of plastics to be reduced poses “some degree of risk for IPL” over time, even if the company doesn’t have any direct exposure to the current focus on plastic bags, food service items and straws.
Part of solution
Davy analyst Flor O’Donoghue, who also began coverage of IPL shares with an “outperform” rating, said that the company could be seen as “part of the solution rather than part of the the problem” amid a global “war on plastics”.
"Crucially, all IPL Plastics products are fully recyclable. In addition, a number of its product lines use a large percentage of recycled plastic in their production," said Mr O'Donoghue. "Moreover, a high proportion of IPL Plastics' products are made from polypropylene and polyethylene, which are among the preferred polymers in relation to recyclability."
Mr O’Donoghue said IPL Plastics’ products such as wheeled bins” help to improve recycling rates and facilitate better consumer behaviours”, while its returnable packaging solutions products “effectively replace single-use cardboard with multi-use plastic products”.
Shares in IPL closed on Monday in Toronto at $13.25, down 25 cent from their IPO price. BMO has a $14 price target on the stock, while Davy has a $15.50 objective.