Transcontinental Inc. (TSX: TCL.A) is a Canadian printer and flexible packaging provider that operates in three segments, namely packaging, printing, and others. The company’s packaging segment features the production of different plastic products geared toward consumer goods.

Key Updates:

• Stable dividend: The company has a strong history of consistent dividend payment, backed by stable cash flows. Notably, in FY21, the company reported a total dividend payment of CAD 78.3 million, as compared to CAD 77.9 million in pcp. Moreover, the TCL.A stock is carrying a dividend yield of ~4.41% on an annualized basis, which looks impressive considering the futuristic interest rate scenario. Also, the company reported a 10.2% CAGR growth in its dividend distribution from 1993 to 2021, which showcases the strong footing of the company in the investor's portfolio.

Source: Company Presentation

• Robust fourth-quarter performance: During the fourth quarter of FY21, the company reported an 18.3% growth in its revenue to CAD 775.8 million vs CAD 655.7 million in pcp, supported by solid organic growth from both Packaging and Printing segments. This was primarily attributed to a rise in the resin prices coupled with improved demand from the reopening of the economy.

• Prudent Working Capital Management: The company commands higher short-term liquidity and reported quick ratio and a current ratio of 1.11x and 1.63x, respectively, in FY21, which is higher than the industry median of 0.94x and 1.45x, respectively. This signifies the efficiency with which the company is utilizing its current and short-term assets such as cash and other receivables to manage day-to-day business operations.
  

• Impressive outlook: For FY22, the management expects volume growth driven by new contract signing coupled with the introduction of new products. Within the printing sector, the group expects a revival in the printing volume, supported by the growth in its in-store marketing activities and other growth activities. Additionally, the company also expects an increase in operating earnings in FY22, as compared to FY21, which is encouraging.

• Issuance of Debt: On January 27, 2022, the company issues CAD 200 million of unsecured notes with a due date of February 2025. As per the management, the company would use the proceeding to repay its existing indebtedness, which includes repaying the tranche of term loans maturing on November 1, 2022, which is before the maturity date. Additionally, a part of the above funds would be used for other general corporate purposes.

• Healthy balance sheet: The company reported a healthy Debt /Equity ratio of 0.64x in FY21, as compared to the industry median of 1.23x, giving relief from the higher interest expenses, which could drain the profitability. Moreover, long-term debt to total capital stood at 31.7% in FY21, as compared to the industry median of 35.7%. This illustrates that the company has a lower balance sheet risk.
  

Risks associated with the Business:

The company might witness margin pressure due to the increase in input costs like raw materials, labor to name a few. Further imposition of restriction on account of rising Covid cases might hinder the demand for packaging products due to supply chain distribution. 

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• Higher topline:A announced its full-year results, wherein the company posted revenues of CAD 2,643.4 million in FY21, improved from CAD 2,574 million in FY20. The growth was supported by improved volume in the Packaging Sector, organic growth, and the recent acquisition of BGI Retail Inc. in the Printing Segment.

• Lower Operating Earnings: Operating earnings slide marginally to CAD 233.8 million in FY21, as compared to CAD 241.4 million in FY20 due to a rise in operating expenses (CAD 2,188.5 million in FY21 v/s CAD 2,074.6 million in FY20), partially offset by lower restructuring and other costs (CAD 12.7 million in FY21 v/s CAD 41.4 million in FY20).

• Intact Bottomline: Net earnings stood were recorded at CAD 130.5 million in FY21, versus CAD 131.8 million in FY20. The company’s net profit was partially supported by lower net financial expenses and a decline in income taxes.
  

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 45.59% stake, Jarislowsky Fraser, Ltd. and Foyston, Gordon & Payne Inc. are the major shareholders in the company with an outstanding position of 10.95% and 9.41%, respectively.

Source: REFINITIV, Analysis by Kalkine Group.

Valuation Methodology (Illustrative): Price to Earnings based

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendations:

The company reported its gross margin and EBITDA margin of 47% and 17.1%, respectively in FY21, as compared to the industry median of 25.9% and 15.5%, respectively, which indicates better operational efficiency. The printing segment performed well during the last quarter of FY21, while the management expects the momentum to continue in the coming quarters, which would be reflected in the coming quarters. Within the printing segment, the company is implementing control costs strategies to improve its operational profitability. Additionally, the stock of TCL.A closed above its 50-days and 100-days simple moving averages, indicating a bullish pattern. The stock has been valued the stock using the Price to Earnings-based relative valuation method and has arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like TriMas Corp, Winpak Ltd etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of TCL.A at the current market price of CAD 20.15 at 9:51 AM Toronto time on February 22, 2022.

One-Year Technical Price Chart (as on February 22, 2022). Analysis by Kalkine Group

*Recommendation is valid on February 23, 2022, price as well. 

 Technical Analysis Summary

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV. 

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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