Quebecor Inc

Quebecor Inc (TSX: QBR.B) is a communication holding company who operates through Telecommunication, Media, and Sports and Entertainment segment. 

Key highlights

• Sequential growth in a challenging environment: The company is continuously working closely with customers in the telecommunication market segment. There was a net increase of 71,700 revenue generating units (“RGU”) in 2020, including 150,600 connections to the mobile telephony service, 69,500 subscriptions to the Internet access service. As a result, operating matrix improved on a sequential basis in a challenging environment, which is admirable.

Source: Company

• Increase in cash and cash equivalents: The on-going steady performance of the company’s operations helped them in achieving strong financial performance, where they recorded cash flows from operations at CAD 115.6 million in 2020, against CAD (6.6) million in the previous corresponding period, which helped the group in increasing its cash and cash equivalents position to CAD 136.7 million, against CAD 14 million in 2019.

Source: Company

• Industry beating margins: The Company outperformed the industry margin profile, which is a key positive. In FY 2020, the group reported EBITDA margin, operating margin, and a net margin of 45.2%, 25.7% and 13.5%, respectively, which stood higher than the industry median of 23.1%, 17.0% and 4.9%, respectively.

• Liquidity & Consolidated debt: As on December 31, 2020, the company holds cumulative liquidity of CAD 2.58 billion with CAD 781.5 million in cash and cash equivalents. The company also hold a consolidated debt of CAD 5.78 billion, which decreased by CAD 211.8 million. 

Financial overview

Source: company

• In FY 2020, the company reported Revenues of CAD 4.32 billion, increased by CAD 24 million, compared to CAD 4.30 million in the previous corresponding period. The revenue from telecommunications segment increased by CAD 142.2 million, or 4.1% to CAD 3.62 billion as against CAD 3.48 billion in 2019, partially offset by media segment and sports segment where company recorded a decline.

• The company posted an EBIT of CAD 790 million, increased by CAD 23.5 million or 3% as compared to CAD 766.5 million in 2019, primarily based on higher revenues and lower employee cost, partially offset by higher depreciation cost.

• Net income in FY 2020 stood at CAD 617.4 million, against CAD 658.3 million. The decrease in net income was mainly dur to higher income tax expense. 

Risks associated with investment

The pandemic crisis has reduced operations of many of the company’s business partners that led to a substantial slowdown in many of the group’s segments in the first half of 2020. Many restrictions played a direct role to drag down the company’s financial performance. Although the government has gradually announced the stages of its reopening plan, if the pandemic situation arises again, then it may hinder the business of the company also. 

Valuation Methodology (Illustrative): Price to Earnings

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The prudent operations and strong balance sheet served the company well in 2020. As a result, despite the pandemic's difficult business environment and its impact on some of its operations, the group posted a 3.9% increase in adjusted EBITDA and a 14.7% increase in cash flow from operations in 2020. Furthermore, it reduced the debt‑to‑equity ratio from 2.91x in 2019 to 2.68x in 2020. Meanwhile, it began the roll‑out of its 5G network with a successful first deployment in December 2020, strengthening its industry‑leading position and demonstrating its determination to stay at the cutting edge of technological change and delivering a world‑class experience for customers. Therefore, based on the above rationales and valuation, we recommend a "Hold" rating at the closing price of CAD 35.48 on March 19, 2021. We have considered Shaw Communications Inc, BCE Inc, Cogeco Communications Inc etc. as the peer group for the comparison.

1-Year Price Chart (as on March 19, 2021). Source: Refinitiv (Thomson Reuters)

Transcontinental Inc.

Transcontinental Inc. (TSX: TCL.A) operates in packaging and printing industry across North America, and Canada.  The packaging segment of the company attributed to the production of different plastic products related to consumer goods. Additionally, company offers premedia, printing and distribution services via printing segment. The group is also positioned as the leading Canadian French-language educational publishing group.

Key Updates:

• An income play: Over the years, the company distributed continuous dividend to its shareholders over a period of time. The group’s dividend has increased at a CAGR of 9.8% since 2010 supported by stable cash flows, which is a key positive. Moreover, At the last closing price, the stock of TCL.A reported an impressive dividend yield of ~4.02%, which is decent considering the current interest rate environment.         

Dividend History; Source: Refinitiv (Thomson Reuters)

• Constant Reduction in total debt: The group has consistently reduced its total debt in the recent quarters, which implies prudent capital management, which is a key positive. Total debt at the end of Q1FY21, stood at CAD 1,070 million, as compared to CAD 1,174.9 million in Q4FY20 and CAD 1,226 million in Q2FY20. This is likely to improve the company’s overall financial flexibility.
• Demand revival from packaging segment: A reported improved traction from its packaging segment, supported by the launch of new products. Moreover, the group is focusing on enhancing its Research & Development in order to provide better offerings within the sustainable packaging segment.

Q1FY21 Financial Highlights:

• A announced first quarter result, wherein the group posted revenues of CAD 622.7 million, lower than CAD 705.8 million in Q1FY21. The decrease of 11.8% was primarily attributable to a lower volume from the Printing Segment due to the negative impact from the COVID-19 coupled with disposal of the paper packaging operations during Q1FY20. Meanwhile, the decline was partially offset by the solid organic growth from Packaging segment coupled with additional revenues generated from the acquisition of Artisan Complete Limited within the Printing Sector.
• Operating earnings before depreciation and amortization stood at CAD 100.9 million, as compared to CAD 95.7 million, a year ago. The improvement was driven by lower operating expenses (CAD 517 million versus CAD 596.8 million in pcp).
• Operating earnings stood at CAD 47.2 million, higher than CAD 40.8 million in the previous corresponding period.
• Net earnings recorded at CAD 27.7 million, up from CAD 6.4 million in Q1FY21, supported by higher operating earnings and lower net financial expenses (CAD 10.8 million versus CAD 14.0 million in pcp).
• The group reported a cash balance of CAD 182.0 million, while total assets were recorded at CAD 3,408.1 million.

Income Statement Highlights- Q1FY21

(Source: Company Reports)

Risks: Increase in the raw-material prices would impact the company’s margins and overall cash flows. 

Valuation Methodology (Illustrative): Price to Earnings based

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

Stock Recommendation:

In Q1FY21, the group reported a higher gross margin and EBITDA margin of 47.3% and 17.6%, respectively, v/s the industry median of 38.7% and 16.1%, respectively. Due to an elevated demand for food and everyday consumer products, the group has generated strong growth from the packaging segment, while we believe, the above momentum to continue in the coming quarters, supported by customer’s preference towards home delivery services. On the other hand, the management expects a gradual recovery printing sector, which would further contribute to the growth in overall operation in the coming quarters. Notably, the group has lowered its dependency on the printing segment over the years, which has resulted in a balanced risk-profile.               

Company Presentation

We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like BCE Inc, Quebecor Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 21.85 on March 19, 2021.

One-year Price Chart (as on March 19, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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