TC Transcontinental Inc.

TC Transcontinental Inc. (TSX: TCL.A) operates in packaging and printing segments across North America and Canada. The group is also positioned as the leading Canadian French-language educational publishing group.

Key Highlights:

• Stable Dividend Payment: Over the years, the company has distributed consistent dividend to its shareholders, aided by stable cash flow generation, which is encouraging. From 1993 to 2020, the company reported an 11% CAGR growth in its dividend payment. Moreover, at the last traded price, the stock was offering a dividend yield of ~3.7%, which looks decent considering the current interest rate scenario.        

Five years dividend history

• Constant Reduction in Net Debt: The company has reported a lower net debt in the recent past, which indicates higher financial flexibility and is a key positive. The improvement was driven by prudent capital management by using solid free cash flow.

Source: Company Presentation

• Acquisition of BGI Retail Inc.: On June 01, 2021, the group reported the acquisition of BGI Retail Inc., which is a full service in-store design and solution partner for retailers and global brands. The group is focusing on continuing its growth in the in-store marketing (ISM) vertical, which provides significant opportunities within the printing segment.

Q2FY21 Financial Highlights:

• A announced its quarterly result, wherein the company reported revenue of CAD 623.3 million, as compared to CAD 625.1 million in previous corresponding period (pcp). This decline was mainly due to the negative impact of the exchange rate variation on the Packaging Segment, partially offset by organic growth in the other segments.
• Operating earnings stood at CAD 55.9 million, higher than CAD 44.1 million in pcp. The quarter was marked by lower operating expenses (CAD 516.3 million v/s CAD 520.8 million in pcp) and slightly lower Depreciation and amortization (CAD 50.6 million v/s CAD 53.2 million in pcp).
• Net earnings stood at CAD 35.6 million, higher than CAD 25.8 million in pcp, supported by lower net financial expenses (CAD 9.5 million v/s CAD 11.7 million in pcp).

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The group might witness pressure from elevated raw materials cost, which might impact the company’s margin and cash flows. Notably, raw materials prices constitute a major chunk of the expenses.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

With the acquisition of BGI Retail, the group would enhance its product portfolio across in-house design, engineering, manufacturing, installation and management of retail solutions and brand-defining consumer experiences. This would boost the company’s presence across indoor and outdoor signage, displays, fixtures and furniture for retail spaces, which is a key positive. The company’s total debt reduced to CAD 897 million in Q2FY21, from CAD 1,020.1 million in Q4FY20, which is encouraging. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a target upside of single-digit upside (in percentage terms). Hence, considering the above facts, we recommend a ‘Hold’ rating on the stock of TCL.A at the last closing market price of CAD 24.29 on June 17, 2021.

One-Year Technical Price Chart (as on June 17, 2021). Analysis by Kalkine Group

Corus Entertainment Inc.

Corus Entertainment Inc. (TSX: CJR.B) is a media and content company which operates in the diversified media industry and has two business segments, which includes television and radio.

Key Highlights:

• An income Play: The group has a solid history of consistent dividend payment, supported by stable cash flows, which is a key positive. Notably, at the last traded price, the stock was offering a dividend yield of ~4.1%, which looks impressive considering the current interest rate scenario.

Five years dividend distribution 

• A decline in the total debt: The company has prudent capital management, as it has managed to reduce its total debt on a periodical basis, which is a key positive as it enhances the overall financial flexibility of the firm. Additionally, a lower borrowing also resulted in a lower interest expense, which further supports the profitability and cash flows. Total debt was recorded at CAD 1,413.7 million in Q2FY21, lower than CAD 1,473.6 million Q1FY21 and CAD 1,646.8 million in Q2FY20.
  

• Robust Margins: The company commands a higher margin than its peers, which is a key positive and denotes operational efficiency and better cost-management. Gross margin and EBITDA margin stood higher at 62.1% and 66.2%, respectively, in Q2FY20, as compared to the industry median of 57.7% and 28.9%, respectively. Moreover, the group reported a net margin of 11.1%, significantly higher than the industry median of 8.4%.
  

• Operational update: Recently, the company reported additional access of 115,000new Canadian creators to its active roster, strengthening the company's investment in influencer marketing and media strategy. The group is focusing on influencer marketing in order to reach a higher number of audiences. As per the recent study, creator marketing remains a key driver for brand engagement, while the industry expected to grow to CAD 15 billion dollars by 2022.
  

Q2FY21 Financials Highlights:

• The company announced its second quarter results, wherein the company posted revenue of CAD 358.874 million, lower than CAD 375.995 million in the previous corresponding period (pcp). The decline was primarily due to lower income from both Television and Radio segments.
• Income before income taxes stood at CAD 53.296 million, increased from CAD 30.355 million in Q2FY20, thanks to a significantly lower direct cost of sales, general and administrative expenses (CAD 246.234 million v/s CAD 260.086 million in pcp), coupled with a decline in the interest expense and integration, restructuring & other costs.
• Net income stood higher at CAD 39.897 million, as compared to CAD 22.423 million in Q2FY20.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: Due to the extension of COVID 19 restrictions, the company might witness a hindrance in the service, both across the digital and radio operations.

Stock Recommendation:

The group has a diversified revenue base and has a Leading Portfolio of Television, Radio and Digital Assets with ample presence in Local Markets. Despite the current economic slowdown, the company has successfully reported a surge in the Cash provided by operating activities of CAD 157.089 million in Q2FY21, as compared to CAD 123.215 million in Q2FY20. The improvement was supported by higher net income coupled with a decline in the payment of program rights. In the recent few years, the group has reported a solid growth from the television segment through an optimized advertising strategy, which is impressive. Moreover, the company made its mark in the OTT platform and is focusing on the digital advertising markets, which have offers ample scope of expansion to the group. On the valuation front, the stock is available at a price to earnings multiple of 6.7x on an NTM basis, compared to the industry mean of 11.5x. Hence, considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 5.83 on June 17, 2021.

One-Year Technical Price Chart (as on June 17, 2021). Analysis by Kalkine Group

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

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