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  Adhering to Intertape

BENJ GALLANDER and BEN STADELMANN

Wednesday, July 11, 2012

Way back in February 2008, soon after Intertape Polymer was purchased at $2.66, we waxed philosophical on its problems and potential in this column. The company's three major shareholders had stupidly turned down an offer from Littlejohn Fund III at $4.76 a share.

The board of directors, who approved the takeover and stated that they would resign if it was not accepted, did indeed step down. The stock price cascaded downwards. This led the founder and former CEO of the company, Mel Yull, to return as the head honcho.

The woebegone stock price and the corporate history enticed us to buy. Apparently, way too early.

The stock cratered to a low of 39 cents during the turmoil of 2009. With the recession battering revenues, the pattern of losing money year after year continued. In fact, from 2006 through 2010, red ink was the constant colour of the day. Only the scale varied, with the losses somewhere between $8 million and $167 million annually.

Finally, in 2011, black ink dotted the landscape with earnings near $9 million. Hallelujah! With the success, the stock price soared, recently touching a high of $8.20, before settling just below that level.

What led to all of the problems, besides the recession? Back in 2008, the Canadian dollar flew and regularly was described as the "high Canadian dollar." We suggested that tag was silly, and we have ultimately been proven correct as the currency settled at its increased valuation.

However, there is no question that the rapid appreciation hurt the company and was partly to blame for the closing of the Brantford facility last year and why the shrink film business will be transferred from Nova Scotia to Utah in the near future.

In addition, competitive pressures from giants such as 3M and AEPI Enterprises shrunk margins. Costs were also excessively high, and realigning them to more reasonable levels was a necessity.

After Mel concluded that the turnaround was well established, he decided to pass the torch, and a search was commenced for his replacement. After what was described as a thorough hunt, the mantle passed to his son Greg. Certainly, from our quarter, this apparent nepotism was questionable, but since Greg became the leading man, the company has travelled in the right direction.

The most recent quarter was a beauty. Net income popped to $8.7 million, up from a slight loss a year ago. EBITDA jumped by 73.3 percent to $20.8 million, accompanied by an increase in gross margins from 12.4 percent to 16.5 percent. Revenues were only up about 3.3 percent, with that being negatively impacted by the closure of the Brantford plant.

More costs of this nature are forthcoming, as the business will take a hit of about $15 million this quarter, both because of the move from Nova Scotia and the closure of the Richmond, Kentucky, factory.

An additional $5 million of charges will be reckoned with later on, but ultimately, $5 million to $6 million should be tacked onto the bottom line annually.

Though Intertape has staged a huge recovery, our Initial Sell Target of $15.24 is predicated on further success. Prior to 2005, the stock price traded above this level every year, almost touching $50 just prior to the millennium. While that high-water mark appears to be pie in the sky, a double-digit share price might indeed not be far away.


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