Company Overview: Transcontinental Inc is a printing company. The Company has operations in print, flexible packaging, publishing and digital media, both in Canada and the United States. Its segments include the Packaging Sector, the Printing Sector and the Media Sector. The Packaging Sector is engaged in the flexible packaging in North America, and has operations in Guatemala, Mexico, Ecuador, United Kingdom, New Zealand and China. The Printing sector provides an integrated service offering for retailers, including flyer printing and in-store marketing products, and door-to-door distribution through Publisac in Quebec and Targeo, a pan-Canadian distribution brokerage service. The Media Sector engaged in print and digital publishing products, in French and English, of various types, such as newspapers, educational books, specialized publications for professionals, retail promotional content, mobile and interactive applications, and geotargeted door-to-door and digital distribution services.

Stocks’ Details

Strategic Shift into Flexible Packaging and Acquisition Synergies are Key Catalysts: Canada’s biggest printer company, Transcontinental Inc (TO: TCL) is involved in providing packaging solutions in North America. It is also a leading Canadian French language educational publishing group, which is engaged in creating quality products and services that enable enterprises to address the need, reach and hold their target customers. The company’s operating segments consist of the following viz Packaging sector, Printing sector and Other. The packaging sector focuses on lamination, extrusion, printing, as well as transforming packaging solutions. Whereas, the Printing sector incorporates flyer, pre-media services, and in-store marketing product printing, door-to-door delivery, print solutions for newspapers, magazines, and personalized and mass-marketing products. The other segment is the media sector that is involved in generating revenue from print and digital publishing products in English and French.

In FY19, the company reported adjusted revenue of ~$3 billion, up 20.1% on a year over year basis. The increase can primarily be attributed to flexible packaging expansion strategy execution, which includes the acquisition of Coveris Americas. The company’s Packaging Sector (~53.1% of total revenues in fiscal 2019, up from 15.1% in 2015) has approximately 4,300 employees along with a network of 20 packaging plant. The company is making a strategic shift into flexible packaging, which is evident via an increasing share of this segment in total revenue over the past few years. The Printing Sector accounted for 43.9% of the total revenues and has a network of 17 printing plants. The other segment (media) contributed ~3% of total revenue in FY19 and has 12,600 book titles published, including all educational levels with ~200 employees.

Adjusted operating earnings came in at $348 million in FY19, as compared to $356.9 million in FY18. Adjusted net earnings per share in FY19 stood at $2.52 as compared to $2.91 per share in FY18. Cash flow from operating activities in FY19 came in at $431.6 million, up from $312.5 million in FY18. The company witnessed a compound annual growth rate of ~11% in its revenue across FY15-FY19. The company saw robust growth in FY19 into flexible packaging following a strategic shift in focusing on this segment. Based on higher R&D investments and acquisition synergies, the company has managed to create a robust & better-quality product and services to offer improved customer experience, which is a key positive. Moreover, via faster and more responsive go-to-market strategies, the company expects modest organic revenue growth in FY20 & beyond. Notably, cash flow from continuing operating activities increased at a CAGR of ~10.6% across FY15-FY19. Dividend paid per share increased at a CAGR of 10.6% in a period across FY10-FY19.

 Revenues & Adjusted EBITDA (Source: Company Reports)

Cash Flow & Dividend (Source: Company Reports)

Q4FY19 Financial Highlights for the period ended 27 October 2019: Transcontinental reported fourth-quarter fiscal 2019 results on December 12, 2020. The company reported adjusted earnings of $0.80 per share, down from $0.99 per share reported in the year-ago quarter. Total revenues for the period declined 4.6% and came in at $790.9 million. This decline was on the back of lower revenues from the Printing Sector. The decrease in revenues in the fourth quarter was partly offset by the enhanced deferred revenues pertaining to the sale of the Fremont, California building to Hearst.

Packaging Sector: Revenues from Packaging segment represented ~52.5% of total revenues in the fourth quarter, which decreased 2% on a year-over-year basis to $409.2 million. The decrease in revenues can be attributed to the unfavourable impact of judicial changes on the agricultural packaging product offering along with lower volume in one of the segments. However, favourable exchange rate effect and synergies from Trilex acquisition were key positives.

Printing Sector: Printing revenues contributed ~44.2% of total revenues and decreased 9.3% on a year-over-year basis to $344.2 million.  The decline was on the back of lower volume in the retailer-related service offering.

Other Segment: Revenues from other segment (media segment) came in at $25.8 million, as compared to $31.9 million reported in the year-ago quarter.

Q4FY19 Segmental Highlights (Source: Company Reports)

Operating Highlights: During the quarter, adjusted operating earnings came in at $106.8 million, down 18.8% on a year over year basis. Operating expenses decreased 4% on a year over year basis, primarily due to positive synergies achieved in the Packaging Sector along with operational efficiency initiatives in the Printing Sector. Adjusted net earnings decreased 19.7% and came in at $69.9 million, during the quarter. The company declared a quarterly dividend of $0.22 per share.

Segment-wise, Packaging adjusted operating earnings stood at $38.1 million, up from $34.6 million reported in the year-ago quarter. Printing segment adjusted operating earnings stood at $67.2 million, a decline of 16% year over year.

Balance Sheet & Cash Flow Details: The company exited the quarter with a cash balance of $213.7 million, as compared with $40.5 million as of Oct 28, 2018. Net debt at the end of the period stood at $1.17 billion as compared to $1.42 billion. At the end of the quarter, the company’s net debt leverage ratio was 2.5x, as compared to 3.1x as of Oct 28, 2018. During the quarter, cash flow from operating activities came in at $158.1 million.

Net Debt Leverage Ratio & Cash Details (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 41.7% of the total shareholding. Jarislowsky Fraser, Ltd. is the entity holding maximum shares in the company at 10.92%. Foyston, Gordon & Payne Inc. is the second-largest shareholder, with a holding of 10.43%.

Top Ten Shareholders (Source: Thomson Reuters) 

Digging into Transcontinental’s Recent Updates: 

On January 20, 2020, the company announced that it had completed the sale of its paper and woven polypropylene packaging operations to Hood Packaging Corporation. The winding-up of this transaction facilitates the company to reduce its net indebtedness ratio to ~2.0x, consequently giving it the financial flexibility to continue its transformation via targeted acquisitions.

On January 13, 2020, the company announced the buyout of Artisan Complete Limited; a company focused on the establishment of engaging retail environments, point-of-purchase displays and large format printing. This deal, which follows the purchase of Holland & Crosby Limited in October 2019, is aligned with the company’s strategy to strengthen its foothold in-store marketing product printing vertical.

Key Metrics:  In FY19, the company had a gross margin and EBITDA margin of 46.4% and 16.6%, which was lower than the FY18 figure of 50.3% and 21.4%, respectively. Nonetheless, quick ratio and current ratio in FY19 stood at 1.62x and 2.26x, higher than the FY18 value of 0.89x and 1.31x, respectively, depicting a strong liquidity position. The company debt-to-equity multiple in FY19 stood at of 0.82x, lower than the debt-to-equity of 0.89x in FY19, demonstrating a better financial position.

Key Metrics (Source: Thomson Reuters) 

Outlook: Going forward, the company is expected to continue focusing on the packaging segment via organic and inorganic growth which is in sync with its long-term vision of becoming the market leader in North America in flexible packaging. The company is also expected to improve margins in the packaging segment via realized synergies along with the focus on production efficiency in the near term. It also expected to continue strengthening its product portfolio to gain the market. For FY20, the company expects moderate organic revenue growth from the packaging segment, followed by more substantial expansion in FY21. On Printing side, the group is expected to focus more on the profitability by adjusting its cost structure and investing in automation to improve production efficiency. Also, the management would be focusing more on long term contracts which, in turn, would result in higher market share. Lastly, with respect to the Media Sector, the company expects to record a decent performance in terms of profitability, in the coming quarters. Also, the group is expected to spend ~100 million in capital expenditure. 

On the flip side, heightened popularity and digitization in the advertising industry limited the prospects of the commercial printing industry. Additional, substantial investments to keep pace with ever-changing technologies and to gain economies of scale can compel small firms to go out of business or to join forces with larger ones. 

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Price to Cash Flow Multiple Approach

Price to Cash Flow Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Valuation Methodology: EV/EBITDA Multiple Approach

EV to EBITDA Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The company anticipates balanced organic revenue growth from the packaging segment in FY20, primally on the back of shift into flexible Packaging and acquisition synergies. As on 13 February 2020, the stock has a market cap of ~$1.47 billion with a PE multiple of ~8.6x and an annual dividend yield of ~5.3%, suggesting a decent opportunity for accumulation.

The company has also witnessed a compound annual growth rate of ~11% in its revenue during FY15-FY19. We have valued the stock using Price to Cash Flow and EV/EBITDA multiple, and for the said purpose, we have considered peers like Corus Entertainment Inc (TO: CJR), Shaw Communications Inc (TO: SJR) and Quebecor Inc (TO: QBRb). Therefore, we have arrived at a target price with an upside in lower double digit (in percentage terms). Considering the above factors, we give a “Buy” recommendation on the stock at the current market price of $16.38 per share, up ~2.4% on 13 February 2020. 

 TCL Daily Technical Chart (Source: Thomson Reuters)

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