Transcontinental Inc. (TSX: TCL.A) is a Canadian print media company which majorly conducts its business in Canada and the United States.  The company primarily operates in three segments, namely packaging, printing, and others. The company’s packaging segment generates revenues from the manufacturing and recycling of flexible plastic and paper products.

Key Updates:

• Stellar quarterly performance: During the first quarter of FY22, the company reported 10.9% growth in its revenue to CAD 690.6 million vs CAD 622.7 million in pcp, supported by 13.9% YoY growth from Packaging sector and 7.7% YoY growth from the Printing segments. This increase was primarily attributed due to surge in the resin price and recent acquisition of H.S. Crocker Company and BGI Retail Inc which enable increase in volumes.
  

• An income play: The company has a strong history of dividend distribution, which establishes the fact that the company’s business is resilient and has reported stable cash flows over the years.

Source: REFINITIV, Analysis by Kalkine Group  

• Stable dividend: The company has a strong history of consistent dividend payment, backed by stable cash flows. Notably, in Q1 FY22, the company reported a total dividend payment of CAD 19.5 million. Moreover, the TCL.A stock is carrying a healthy dividend yield of ~5.588% on an annualized basis, which looks impressive considering the present interest rate scenario.

• Healthy balance sheet: The company reported a healthy Debt /Equity ratio of 0.60x in Q1 FY22, as compared to the industry median of 0.81x, giving relief from the higher interest expenses, which could drain the profitability. Moreover, long-term debt to total capital stood at 31.4% in Q1 FY22, as compared to the industry median of 33.3%. This illustrates that the company has a lower balance sheet risk.

• Prudent Working Capital Management: The company commands higher short-term liquidity and reported a current ratio of 1.59x, respectively, in Q1 FY22, which is higher than the industry median of 1.48x. 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: During FY22, the management expects organic volume growth from the packaging segment due to signing of new contracts, launching of new products into the market. Additionally, in the printing segment, management is optimistic about recovery in the printing volume. Thus, the management is anticipating higher revenue for the full year 2022.

• 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.
  

Risks associated with the Business:

The company might witness margin pressure due to the increase in input costs like raw materials, labor costs 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.

Q1 FY22 Financial Highlights:

    Q1 FY22 Income Statement Highlights (Source: Company Report)

• Improved topline:A announced its first quarter earnings for FY22, wherein the company posted revenues of CAD 690.6 million in Q1 FY22, improved from CAD 622.7 million in pcp. 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 33.8 million in Q1 FY22, as compared to CAD 47.2 million in pcp due to a rise in operating expenses (CAD 601.6 million in Q1 FY22 v/s CAD 514.6 million in Q1 FY21), partially offset by lower restructuring and other costs.

• Declining Bottomline: Net earnings stood at CAD 18.3 million in Q1 FY22, versus CAD 27.8 million in Q1 FY21. 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 37.47% stake, Jarislowsky Fraser, Ltd. and Caisse de Depot et Placement du Quebec. are the major shareholders in the company with an outstanding position of 11.00% and 4.92%, 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 strong revenue growth across the segments, where packaging segment witnessed year over year growth of 13.9% and printing segment grew 7.7% on a YoY basis. 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.

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 Greif Inc, Richards Packaging etc.

Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of TCL.A at the closing market price of CAD 15.30 on May 20, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 20, 2022). Source: REFINITIV, Analysis by Kalkine Group

*Recommendation is valid on May 24, 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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