Transcontinental Inc. (ASX: TCL.A) is Canada’s largest printing company and a leading player in flexible packaging in North America. Besides, it is also a leading Canadian French-language educational publishing group.

The company has a strong history of rewarding investors with higher dividend yield. The company’s dividends have grown at a CAGR of about 11%. The company recently increased its annual dividend by 2.3% to CAD 0.90 per share.

Q1FY20 Financial Highlights: Transcontinental Inc. announced its quarterly results, wherein the company reported revenues of CAD 705.8 million, down 6.1% on y-o-y basis. Sale of the specialty media assets and event planning activities pressured the top line. Adjusted operating earnings stood at CAD 72.1 million, as compared to CAD 76.7 million in Q1FY18. Lower revenues coupled with higher costs remained a drag. However, improved profitability in the printing segment cushioned operating earnings. Adjusted net earnings stood at CAD 42.8 million, depicting a decline of 5.9% from Q1FY19. Lower adjusted operating earnings and higher adjusted income taxes dragged earnings down.

FY19 Financial Highlights (Source: Company Reports)

Valuation Methodology: P/E Multiple Approach 

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: While the company’s business remains strong, its stock has declined about 22% so far this year, reflecting weak market sentiments. We believe COVID-19 outbreak will have minimal impact on the company. The company’s Packaging segment, which caters mainly to the food industry and generates majority of revenues, will continue to do well and support the business even during the crisis. Notably, the company recently stated that its vertical related to the food industry is running at a high capacity. The food industry remains critical amid any adverse situation, which is a big plus for Transcontinental. However, government restrictions do pose challenges in the printing business, which could witness a slowdown in the near-term. Nevertheless, we expect Transcontinental to come out of the crisis easily and register strong growth in the long-term. The company continues to generate consistent cash flows, which should support higher distribution. Transcontinental stock currently offers a dividend yield of 7.26%, which looks lucrative. Also, the company’s 2019 dividends represent about 17.6% of the cash flows from operations, which we believe is sustainable in the long run. Transcontinental stock trades at a significant discount when compared to the industry mean. For instance, Transcontinental stock trades at a forward P/E multiple of 5.4x compared to the industry (commercial printing services) average of 13.5x. We expect the company’s multiple to expand in the coming quarters. We have valued TCL.A stock using relative valuation method with a target P/E of 6.5x. We have arrived at a target price with an upside in lower double-digit (in percentage terms). Hence, we give a “Buy” recommendation on TCL.A stock at the Closing market price of CAD 12.39 on April 7, 2020.

TCL.A One-Year Daily Price Chart (Source: Thomson Reuters)

Disclaimer

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