Transcontinental Inc

Transcontinental Inc.  (TSX: TCL.A) is a Canadian printer and flexible packaging provider. The packaging segment includes the production of different plastic products geared toward consumer goods. 

The Company sold its paper packaging segment at a price consideration of CAD 70.8 million towards the end of first quarter FY20.

Q3FY20 Financial Highlights: TCL announced its quarterly results, wherein, the company posted revenue of CAD 587.4 million, reflecting a decline of 19.4% on y-o-y basis, majorly attributable to lower volumes from the printing sector due to the negative impact from COVID-19 pandemic, combined with the impact of the disposal of the paper packaging operations during the first quarter of FY20. The business benefitted from improved volumes across several segments which supported the retail supply chain for food and everyday consumer products. Operating earnings stood at CAD 75.3 million, reflecting a surge of 33% on y-o-y basis aided by higher volume and the realization of synergies and cost reduction initiatives along with wage subsidies received from the Government. The company reported net earnings of CAD 48.3 million, significantly higher than CAD 3.4 million in the previous corresponding period (pcp).  The increase was driven by the improved operational performance coupled with a decrease in income tax expense.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company might witness a margin pressure due to the higher resin costs. Furthermore, the business might witness an organic decline within the printing sector which might affect the performance of the company.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendations: The group reported a decent result amid a challenging time. Within the packaging segment, the majority of the operations supports the retail supply chain for food and everyday consumer products that are witnessing a volume growth due to the COVID-19 pandemic, which is a key positive. Furthermore, the company has initiated several operation synergies, which is likely to support the company’s margins as well. Within the printing segment, operational efficiency initiatives are likely to mitigate the impact of the volume decline on operating earnings. In recent months, the gradual recovery in printing volume enabled the group to recall close to 60% of the temporary laid-off employees. Going forward, TCL is focusing on its capacity adjustments and operational flexibility in order to generate favorable cash flows and solid operating margins, which is impressive. The stock of TCL.A has closed above its 200-days simple moving average (SMA) of CAD 14.40, indicating a bullish pattern. Further, at the last traded price, the stock was offering a dividend yield of 5.6%, which is lucrative considering the current interest rate environment. We have valued the stock using P/CF based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered peers like Quebecor Inc, Corus Entertainment Inc etc. Considering the aforesaid facts, and current price movement, we recommend a ‘Buy’ rating in the stock at the closing market price of CAD 16.06 on September 24, 2020.

TCL.A Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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