One Small Cap Industrial Stock Under the Radar – TCL.A

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

• Strong Outlook: As a result of signing new contracts, introducing new products into the market, 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 April 11, 2022. Moreover, at the closing price of CAD 18.34 on March 21, 2022, the stock is delivering a yield of 4.907%, which is encouraging looking at the current market dynamics.

  Source: REFINITIV, Analysis by Kalkine Group 

• Curtailing long term debt: The company is continuously improving its debt/equity ratio by decreasing their long-term debt which stood at CAD 751.4 million on January 30, 2022, against CAD 778.2 million on October 31, 2021. Additionally, in Q1 2022, the company’s debt to equity ratio stood at 0.60x which was lower compared to an industry median of 0.86x.

  Source: REFINITIV, Analysis by Kalkine Group 

• Trading at discounted valuations: The company’s shares are available at an NTM EV/EBITDA multiple of 5.47x compared to the industry median of 7.93x while on NTM Price to Cash Flow multiple, the stock is trading at 4.28x compared to 7.65x. This implies that the shares are trading at a discount against the industry. The stock is undervalued on multiple valuation parameters.

    Source: REFINITIV, Analysis by Kalkine Group

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 Q1 FY2022

Source: Company Filing

• Revenues increased by CAD 67.9 million, or 10.9%, from CAD 622.7 million in the first quarter of 2021 to CAD 690.6 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. and, to a lesser extent, a slightly higher volume in the two main segments.

• Operating expenses increased by CAD 87.0 million, or 16.9%, in Q1 2022 compared to the corresponding period in 2021. This increase results mainly from the rise in raw materials costs, especially the rise in the price of resin, the recent acquisitions of BGI Retail Inc. and H.S. Crocker Company, Inc.

• In the reported period the company’s operating earnings before depreciation and amortization decreased by CAD 12.6 million, or 12.2%, to CAD 90.7 million against CAD 103.3 million in pcp.

• Net earnings attributable to shareholders of the Corporation decreased by CAD 9.3 million, from CAD 27.7 million in the first quarter of 2021 to CAD 18.4 million in the first quarter of 2022. This decrease is mainly due to lower operating earnings, partially offset by the decrease in income taxes and the decrease in financial expenses.
  

Valuation Methodology (Illustrative): EV to Sales

Analysis by Kalkine Group

Stock recommendation

Despite a good performance during a difficult period, the company fell short of management's expectations. The proliferation of the Omicron version produced substantial operational interruptions, which impeded the company's capacity to operate the business efficiently and, when paired with inflationary pressures, had a negative impact on profitability. 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, all of which are important positives.

Sequential improvement in the debt-to-equity ratio and robust dividend yield of more than 4.9% are like crucial positives. Therefore, based on the above rationales and valuation, we recommend a "Buy" rating on the stock at the at the closing price of CAD 18.34 as on March 21, 2022.

One-Year Technical Price Chart (as on March 21, 2022). Source: REFINITIV, Analysis by Kalkine Group

 Technical Analysis Summary

Disclaimer

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