Transcontinental Inc (TSX: TCL.A) is a printing company. It has print, flexible packaging, publishing, and digital media operations, 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: Amid the lower interest rate environment, TCL. A shares offer a lucrative dividend yield of 4.81%, which is significantly higher than the Canada 10-Year government bond yield of 1.66%. Moreover, the company has also maintained consistency in terms of dividend payment over the past decade. Also, over the past 10-years years, the company's dividend has increased with a CAGR of 9.84%.

Dividend History. Source: REFINITIV, Analysis by Kalkine Group

• Recorded Consistency in Margin Profile: Over the past five years, the company has consistently delivered gross margin above 45%, EBITDA margin above 15%, Operating margin of ~10% and Net margin above 5%, respectively. Maintaining consistency shows the strength of the business model against the market competition.
  

Source: REFINITIV, Analysis by Kalkine Group

• Robust Risk Protection Metrics: The company's debt protection metrics are quite strong, as the TTM Net Debt of the company is just 1.97x of its EBITDA, whereas the average peer's Net Debt to EBITDA stood at 2.95x. Further, the company's interest coverage ratio is quite strong. Its TTM interest coverage ratio stood at 6.60x, better than the TTM Peer's average interest coverage ratio of 4.27x.

Source: REFINITIV, Analysis by Kalkine Group 

• Available at a Discount to its Peers. From the TTM Price to Sales multiple standpoints, TCL.A shares are trading at a multiple of 0.64x, whereas the average peers are trading at a multiple of 1.44x, implying a discounted valuation of ~55% against the peer's average. Thus, a value buy from the relative valuation standpoint.

Source: REFINITIV, Analysis by Kalkine Group

Positive Outlook:

In the Packaging Sector, signing new contracts and introducing new products in the market, and despite weaker than anticipated organic growth in the third quarter, we expect organic growth in TCL.A's volumes in Q4FY21 and FY22. In addition, a gradual recovery in printing volumes is also forecasted in the Printing Sector. This anticipated recovery, combined with growth in its in-store marketing activities, gives us confidence about the company's outlook for revenue growth for the quarters to come.

Risks Associated with Investment:

The company is exposed to volatility in commodity prices (short-term challenges presented by the rise in resin price). In addition, a resurgence in COVID-19 cases could also weigh in on the demand offtake and supply chain disruptions. Further, the company is also exposed to interest rate risk and other input costs risks and forex risks.

Financial Highlights: Q3FY21 (ended July 25, 2021)

Source: Company report

• Revenue: During the third quarter under consideration, the company's top line increased by CAD 34.2 million, or 5.8% to CAD 621.6 million against the corresponding period of the previous financial year. The growth in the top line was mainly driven by the Printing Sector, which recorded organic growth of over 14%, while it had been more affected by the pandemic in the prior year. Further, in the Packaging Sector, the solid favourable impact of the rise in the resin price was offset by the negative impact of the exchange rate variation.
• Operating Performance: 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 a decrease in the Canada Emergency Wage Subsidy compared to the corresponding period of the prior year and the short-term unfavorable impact of contractual lags in passing through the rise in the price of resin to customers.
• Net Earnings: 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 Q3FY21.
• Dividend Highlights: 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 hold approximately 45.4% stake. Jarislowsky Fraser, Ltd. and Foyston, Gordon & Payne Inc. are the major shareholders, with an outstanding position of 10.95% and 9.41%, respectively. Institutional ownership in the company stood at 58.82%.

Valuation Methodology (illustrative): EV/Sales-based valuation

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 resins, the company delivered a modest performance in Q3FY21. The company's packaging sector is moving very strongly due to 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 fiscal 2022. Further, the company has robust financial health with solid debt protection metrics that minimize balance sheet risk for the investors. Finally, we expect TCL.A to continue to generate significant cash flows. This should aid the group in reducing their net indebtedness while also providing them with the flexibility needed to pursue their investment strategy focused on organic growth and strategic and targeted acquisitions.

Further, the company is yielding higher, with a dividend yield of ~4.81% and together with a consistent track record of dividend payment and dividend growth over the past decade. This makes TCL.A a lucrative pick from an income-seeking investor's standpoint as well.

Hence, we recommend a "Buy" rating on the TCL.A share at the closing price of CAD 18.70 on November 22, 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

1-Year Price Chart (as on November 22, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on November 23, 2021, price as well.

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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.