Transcontinental Inc.

Transcontinental Inc. (TSX: TCL.A) operates in packaging and printing segments across the North America, and Canada. The group is also positioned as the leading Canadian French-language educational publishing group.

Key Highlights:

• Reduction in Debt-component: The group has reduced its total debt to CAD 1,174.9 million in FY20, from CAD 1,383.1 million in FY19, which has led to lower finance costs and supported the company’s bottom line. Continuation of the above trend would likely to boost the company’s earnings in the coming quarters.
• Better than Industry Margins: The group reported impressive operational performance, which stood higher than the industry median, which is encouraging. The group reported EBITDA margin, operating margin and a net margin of 17.9%, 9.4% and 5.1%, respectively, as compared to the industry median of 15.8%, 8.1% and 3.5%, respectively.
• Positive Technical Indicators: The stock of TCL.A closed above the long-term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish pattern. In the recent past, the stock gained momentum and appreciated ~36% and ~85% in the last six months and nine months, respectively.

(Source: Refinitiv, Thomson Reuters)

• Event Update: The group would disclose its first-quarter FY21 result on February 25, 2021.

FY20 Financial Highlights:

• The group announced its full-year result, wherein the group posted revenues of CAD 2,574 million, lower than CAD 3,038.8 million in FY19. The decline was primarily attributable to a significantly lower traction from the Printing Segment due to the negative impact from the COVID-19 coupled with disposal of the paper packaging operations during Q1FY20, which also acted as a drag.
• Operating earnings before depreciation and amortization stood at CAD 458 million, as compared to CAD 511.5 million in the previous year, partially offset by lower operating expenses (CAD 2,574 million versus CAD 3,038 million in pcp).
• Operating earnings stood at CAD 241.4 million, lower than CAD 309.5 million in the previous corresponding period.
• Net earnings stood at CAD 131.8 million, as compared to CAD 166.1 million in FY19, partially supported by lower net financial expenses (CAD 46.4 million versus CAD 66.9 million in pcp).
• The group reported a cash balance of CAD 241 million, while total assets were recorded at CAD 3,598.4 million.

FY20 Income Statement Highlights (Source: Company Reports)

Risks: Elevated raw-material prices may impact the company’s bottom-line and cash flows.

Valuation Methodology (Illustrative): Price to Cash Flow

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

Despite lower profitability, the group reported stable cash flows from operations at CAD 427 million, as compared to CAD 431.6 million in FY19, which is commendable. The packaging industry is witnessing higher volume growth during COVID-19 pandemic, supported by growth in the retail supply chain for food and everyday consumer product retailers. Thus, the group is expecting organic growth in revenue for FY21. Meanwhile, due to several cost-synergies and operational efficiency initiatives, the company is expecting a slight increase in the operating earnings as well. Despite the impact of COVID 19 pandemic, the company also expects a stable cash flow generation in FY21 and seek to reduce its debt component, which is encouraging and is likely to reduce finance costs. Moreover, the stock carries a lucrative dividend yield of ~4.2%, higher than the TSX composite of ~3.31% on an annualized basis. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers Corus Entertainment Inc, Quebecor Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 21.45 on February 19^th, 2021.

1-Year Price Chart (as on February 19^th, 2021) Source: Refinitiv (Thomson Reuters)

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