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

Key highlights

• Stellar quarterly performance:During Q2 FY2022, the company reported 14.8% growth in its revenue to CAD 715.5 million vs CAD 623.3 million in pcp, supported by 21% YoY growth from Packaging sector and 9% YoY growth from the Printing segments. This rise in revenue was primarily attributed due to surge in the volume, price increases and recent acquisition of H.S. Crocker Company and BGI Retail Inc.

• Improving operating Matrix: Despite the turmoil period, the Company maintained its pace and witnessed spirited performance across its operating margin matrix. The Company is continuously working closely with customers; thus, its presence is increasing along volume, which is appreciable. We believe the momentum to continue in the foreseeable future, as the Company had big capital investment plans to support future growth.

• Strong Outlook: As a result of signing new contracts, introducing new products to the market, continued recovery in printing volume, and investing in new production equipment, the company expects organic volume growth in both of its sectors (Packaging Sector and Printing Sector) in fiscal year 2022 compared to fiscal year 2021. Furthermore, management expects an improvement in adjusted operating profits before depreciation and amortization for fiscal year 2022 compared to fiscal year 2021, which is a significant positive.
  

• 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. Recently, the company declared a quarterly dividend of CAD 225 per share, payable on July 25, 2022. Moreover, at the closing price of CAD 15.77 on June 13, 2022, the stock is delivering a healthy yield of 5.69%, which is encouraging looking at the current market dynamics.

• Curtailing long term debts: The company is continuously improving its debt/equity ratio by decreasing their long-term debts which stood at CAD 743.7 million on May 1, 2022, against CAD 778.2 million on October 31, 2021. Additionally, in Q2 2022, the company’s debt to equity ratio stood at 0.58x which was lower compared to an industry median of 1.18x, which is a key positive.

• Trading at discounted valuations: The company’s shares are available at an NTM EV/EBITDA multiple of 5.0x compared to an industry (Containers & Packaging) median of 7.6x while on NTM Price to Cash Flow multiple the stock is trading at 3.5x compared to 6.7x. This implies that the shares are trading at a discount against the industry. The stock is undervalued on multiple valuation parameters.
  

Risk associated with investments 

The company might witness a margin pressure due to the higher resin costs and other raw material costs. Furthermore, if expected volumes in both areas fall short of expectations, the company's financial performance might suffer.

Financial overview of Q2 FY2022

Source: Company Filing 

• Strong Revenue: The company’s revenues increased by CAD 92.2 million, or 14.8%, from CAD 623.3 million in the second quarter of 2021 to CAD 715.5 million in the corresponding period in 2022. This increase is mainly attributable to the recent acquisitions of BGI Retail Inc. and H.S. Crocker Company, Inc. along, higher volume in the two main sectors.

• Higher operating expenses: Operating expenses increased by CAD 98 million, or 19%, to CAD 611.9 million in Q2 2022 compared to the corresponding period in 2021. This increase results mainly from the rise in raw materials costs, higher volume in the two main sectors, the recent acquisitions of BGI Retail Inc. and H.S. Crocker Company, Inc.

• Slight decline in operating earnings: In the reported period the company’s operating earnings decreased slightly by CAD 9.8 million, or 17.5%, to CAD 46.1 million against CAD 55.9 million in pcp.

• Drop in net earnings: The company’s net income decreased to CAD 28.3 million in Q2 2022, compared to CAD 35.6 million in Q2 2021. This decrease is mainly due to lower operating earnings, partially offset by an increase in depreciation expenses.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 36.85% of the total shareholding. Jarislowsky Fraser, Ltd. and Caisse de Depot et Placement du Quebec hold the company's maximum interests at 11.01% and 4.92%, respectively. The company's institutional ownership stood at 46.98%. Higher institutional holding boosts the confidence of the retail investors.

Valuation Methodology Illustrative: Price to Cash Flow Based

Stock recommendation 

In Q2 2022, the company overcome supply chain challenges and inflationary pressure and reported decent set of financial numbers, where it witnessed 14.8% growth in its revenue to CAD 717.5 million. Supported by 21% YoY growth from Packaging sector and 9% YoY growth from the Printing segments.

The Company is continuously working closely with customers; thus, its presence is increasing along volume, which is appreciable. Furthermore, the business anticipates organic volume increase in fiscal year 2022 as a combination of new contract signings, product introductions, sustained printing volume recovery, and investment in new production equipment. Moreover, on these positive aspects the company foresee an improvement in adjusted operating profits before depreciation and amortization for fiscal year 2022 compared to fiscal year 2021, which is a significant positive.

Sequential improvement in the debt-to-equity ratio and robust dividend yield of more than 4.9% are like other crucial positives. Therefore, based on the above rationales and valuation, we recommend a "Buy" rating on the stock at the at the last closing price of CAD 15.77 as on June 13, 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 June 13, 2022). Source: REFINITIV, Analysis by Kalkine Group

*Recommendation is valid on June 14, 2022, price as well. 

Technical Analysis Summary

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Disclaimer

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