Transcontinental Inc (TSX: TCL.A), is a printing company. It 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.

Investment Rationale

• An Income Play: TCL.A shares are offering a lucrative dividend yield of ~4.36% at the current trading levels, together with a track record of consistent dividend payment over the past decade. Further, the company is built upon strong fundamentals which generate steady cash flows that ensure consistency in dividend payments.  

Dividend History. Source: REFINITIV, Analysis by Kalkine Group

• Manageable Debt: The company’s Debt to Equity ratio at the end of the third quarter of FY21 stood at 0.76x, which is lower compared to the industry median of 1.02x. Further, long-term debt to total capital stood at 29.9% compared to 34.3% of the industry median. This reflects lower balance sheet risk when compared to the industry median.

• Robust Debt Protection Metrics: Together with a lower leveraged balance sheet compared to the industry median, the company’s debt protection metrics are quite strong, with Net Debt to EBITDA ratio of 8.20x vs the industry median of 10.87x and an interest coverage ratio of 5.75x compared to peer’s median of 3.45x at the end of 3QFY21.

• Industry Leading Margin Profile: The company’s margin profile is one of the best within the industry, with gross margin in the third quarter of 2021 stood at 47% vs 25.3% of the industry median and an EBITDA margin of 17.4% vs 15.9% of the industry median.

• Improved Long-term Growth Prospects: In Packaging Sector, the company’s main engine of long-term growth continues to improve operating profitability and demand for their packaging products remains strong. The company continue to secure significant and promising agreements with many customers, while its sustainable packaging products, which contribute to the circular economy for plastic, are gaining momentum. All of this bodes well for the growth outlook in the coming years.

• Strong Organic Growth Expected in Coming Quarters: In the Packaging Sector, as the company is signing new contracts and introducing new products in the market, we believe that the company would report organic volume growth in the Q4FY21 and in fiscal FY22.  In the Printing Sector, we expect continued gradual recovery in printing volume. This anticipated recovery, combined with growth in the company’s in-store marketing activities, gives confidence about the outlook for revenue growth in upcoming quarters.
  

Technical Analysis Highlights:

• CAD 20.11 is acting as a crucial support level and demand zone in the stock,
• After a recent bearish move, TCL.A shares have gone sideways and now consolidating near the crucial support level.
• The momentum indicator, the 14-day RSI is hovering in oversold territory at 24.5, which suggest that a potential pullback could take place in next few trading session.
• Three consecutive inside candlesticks indicating that stock is gaining ground for upside.

Technical Price Chart (as on September 27, 2021). Source: REFINITIVE, Analysis by Kalkine Group

• Risks Associated to Investment: The company is exposed to volatility in the commodity prices (short-term challenges presented by the rise in the price of resin). A resurgence in COVID-19 cases could also weigh on the demand offtake and supply chain disruptions. Further, the company is exposed to interest rate risk, other input costs risks and forex risks as well.

Financial Highlights: Q3FY21

Source: Company Filing

• During the third quarter under consideration, the company’s topline increased by CAD 34.2 million, or 5.8% to CAD 621.6 million against the corresponding period of previous financial year.
• The growth in the topline was mainly driven by the Printing Sector, which recorded an organic growth of over 14%, while it had been more affected by the pandemic in the prior year. Further, in the Packaging Sector, solid favourable impact of the rise in the price of resin was offset by the negative impact of the exchange rate variation.
• Operating earnings declined by CAD 25.1 million, or 33.3%, to CAD 50.2 million against the third quarter of 2020.
• Adjusted operating earnings plummeted by CAD 34.7 million, or 34.0%, to CAD 67.4 million.
• The slippage in operating earnings and adjusted operating earnings was mainly on account of decrease in the Canada Emergency Wage Subsidy compared to the corresponding period of the prior year as well as the short-term unfavorable impact of contractual lags in passing through the rise in the price of resin to customers.
• Net earnings attributable to shareholders plunged by CAD 20.2 million, from CAD 48.3 million in the third quarter of 2020 to CAD 28.1 million in the third quarter of 2021.
• The Board has declared a quarterly dividend of CAD 0.225/share on Class A Subordinate Voting Shares and Class B Shares.

Top 10 Shareholders

Top-10 shareholders in the company together holds approximately 45.3% stake, with Jarislowsky Fraser, Ltd. and Foyston, Gordon & Payne Inc. are the major shareholders with an outstanding position of 10.95% and 9.41%, respectively.

Valuation Methodology (Illustrative): EV to Sales Based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: Regardless of short-term challenges presented by the rise in the price of resin, the company delivered a good operating performance in Q3FY21.

The company's packaging sector is moving very strongly, as a result of signing new contracts and introducing new products in the market. Going forward, we continue to expect decent organic volume growth in the fourth quarter of fiscal 2021 and in fiscal 2022.

However, the impact of contractual lags in passing through the rise in the price of resin to customers and the appreciation of the Canadian dollar against the U.S. dollar should continue to have a negative impact on the sector's profitability for the fourth quarter, but to a lesser extent.

Excluding the impacts of the price of resin and the appreciation of the Canadian dollar, the group expects to post an increase in operating earnings for fiscal 2021 compared to the prior fiscal year, as a result of their operational efficiency initiatives and the anticipated organic growth in revenues.

Further, the company has robust financial health with strong debt protection metrics that minimize balance sheet risk for the investors. Also, a higher yield positions it well for income-seeking investors, with a yield above 4% amid a lower interest rate environment.

Hence, based on the aforementioned rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 20.63 on September 27, 2021.    

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One Year Price Chart (as on September 27, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on September 28, 2021, price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.