Transcontinental Inc

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.

Why Should Investors Book Profit? 

• Rapid rise in the price of resin impacting operating margin: Adjusted operating earnings in the Packaging Sector fell by CAD 7.0 million from CAD 38.2 million in Q2 2020 to CAD 31.2 million in Q2 2021. This drop was mostly due to the negative impact of the substantial and quick increase in resin prices.
• Lower revenues in H1 2021: The company witnessed lower revenue in first half of 2021, where the revenue decreased by CAD 84.9 million to CAD 1,246.0, mainly due to disposing paper packaging operations and decreased revenue from Printing Sector.
• Stretched Valuation: A shares are available at an NTM PE multiple of 10.2x compared to the industry median of 7.5x. This implies that the shares are overvalued against the industry.
• Poor Liquidity Profile: In Q2 2021, the company's current ratio was 1.3x compared to the industry median of 1.41x. While its Quick ratio was also on a lower side at 0.90x V/s 1.22x. Both these lower ratios against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.
• Higher Cash Cycle days: The company’s Cash Cycle (Days) is higher compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 142 days against the industry median of 29.7 days.

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

On a year-over-year basis, the company's performance was positive, but revenues fell by CAD 84.9 million to CAD 1,246.0 million in the first half of FY 2021. The negative impact of the substantial and quick rise in resin prices is affecting the packaging sector's operating margin, which is a cause for worry. Furthermore, the company's liquidity profile is poor, with a lower quick and current ratio, indicating that the company's short-term obligations are growing faster than its ability to fulfil them. Furthermore, the firm is overpriced in comparison to the industry and has a longer Cash Cycle (Days), which is not a good indication. As a result, we recommend a “Sell” rating on the stock at the closing price of CAD 25.73 on August 18, 2021, based on the above rationale and valuation.

One-Year Price Chart (as on August 18, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Wajax Corp

Wajax Corp (TSX: WJX) is a Canadian distributor of industrial components. Its core business is the sale of parts and service support of equipment, power systems, and industrial components through a network of branches in Canada. 

Why Should Investors Book Profit?

• Lower margin profile v/s Industry: In Q2 2022, the Company failed on maintaining its pace and witnessed lower performance across operating matrix against the industry, which exhibits the pressure on company.
• Higher Selling and administrative expenses: In the reported period the company witnessed increased Selling and administrative expenses as a percentage of revenue at 13.2% from 11.2% in the previous corresponding period.
• Poor Liquidity Profile: In Q2 2021, the company's quick ratio was 0.82x compared to the industry median of 1.14x. Lower ratios against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.
• Higher Cash Cycle days: The company’s Cash Cycle (Days) is higher compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 104.3 days against the industry median of 68.2 days.
• Slightly higher Leverage: The company’s debt to equity ratio at the end of June 2021 stood at 0.98x higher than the industry median of 0.74x. Additionally, it’s % LT Debt to Total Capital stood at 45.5% whereas industry median is of 29.2%. These factors imply higher balance sheet risks.

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

The business just released its financial results for Q2 2021, which showed excellent top and bottom-line growth. However, selling and administrative expenditures as a proportion of revenue rose to 13.2 percent from 11.2 percent, and cash flows from operations fell to CAD 36.6 million from CAD 43.3 million in the previous quarter. Furthermore, the company's liquidity profile is bad, with a lower quick ratio showing that the company's short-term commitments are increasing faster than its resources to meet them, as well as a larger Cash Cycle (Days), which is not a positive sign. As a result, we recommend a “Sell” rating on the stock at the closing price of CAD 24.60 on August 18, 2021, based on the above rationale and valuation.

One-Year Price Chart (as on August 18, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.