Transcontinental Inc.

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 Updates:

• An Income Play: Historically, the company has distributed consistent dividend to its shareholders, supported by robust cash flows from operations, which is encouraging. From 1993 to 2020, the company reported an 11% CAGR in its dividend payment. Moreover, at the last closing price, the stock was offering a dividend yield of ~3.8%, which looks decent considering the current interest rate scenario.        

Ten years Dividend Distribution (Source: Refinitiv Thomson Reuters)

• Lower Net Indebtedness indicates higher Financial Flexibility: Over the years, the company has reported a constant decline in its net debt, which is a key positive and indicates improved financial flexibility. The company has lowered its total debt in recent quarters, backed by strong cash flows. At the end of Q1FY21, the company reported total debt of CAD 1,070 million, reflecting a 29% decline over the previous corresponding period. Net indebtedness ratio stood at 1.8x in Q1FY21, improved from 1.9x in Q1FY20.                  

Source: Company Presentation

Q1FY21 Financial Highlights:

• A announced quarterly result, wherein the company reported revenues of CAD 622.7 million, down 11.8% from Q1FY20. The decline was mainly due to a lower sales volume from the Printing Segment on account of the demand destruction scenario due to the ongoing pandemic. The decline was partially offset by the solid organic growth from the Packaging Sector coupled with the positive impact from the recent acquisition of Artisan Complete Limited in the Printing Sector.
• Operating earnings before depreciation and amortization was recorded at CAD 100.9 million v/s CAD 95.7 million in pcp, supported by a lower operating expense (CAD 517 million v/s CAD 596.8 million in pcp) and lower restructuring costs (CAD 4.8 million v/s CAD 13.3 million in pcp).
• Operating earnings stood at CAD 47.2 million, grew from CAD 40.8 million in Q1FY20.
• Net earnings during the period stood at CAD 27.8 million, soared from CAD 6.5 million in Q1FY20, supported by higher operating earnings and lower net financial expenses (CAD 10.8 million v/s CAD 14 million in pcp).
• The group reported a cash balance of CAD 182 million, while total assets were recorded at CAD 3,408.1 million.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Increase in input costs due to elevated raw-material (resin) prices may dampen the company’s margins and overall cash flows.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

Despite the topsy-turvy economic conditions, the company expects organic growth in revenues for FY21, driven by new contracts signing and new product launches to the market. Moreover, the company implemented several cost efficiency initiatives in the recent past, which is expected to support the company’s profitability amidst the elevated raw material prices. Moreover, the management seems confident to generate ample cash flows, which would further support in reducing the company’s debt. Moreover, the group has a decent history of dividend payment and the stock is offering a decent dividend yield amid a low interest rate environment. We have valued the stock using the Price to Cash Flow based relative valuation method and have arrived at a single-digit upside (in percentage terms) upside. For the said purposes, we have considered peers like Shaw Communications Inc, Quebecor Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of TCL.A at the last traded price of CAD 23.63 on May 14, 2021.

One-year Price Chart (as on May 14, 2021). Source: Refinitiv (Thomson Reuters)

Medical Facilities Corporation

Medical Facilities Corporation (TSX: DR) owns a diverse portfolio of surgical facilities in the United States. The group’s ownership includes controlling interest across four specialty surgical hospitals, which are located in Arkansas, Oklahoma, and South Dakota, and an ambulatory surgery center located in California.

Key updates:

• An income play: The company reported a consistent dividend payment in the recent past, backed by stable cash flows, which is a key positive. Notably, in Q1FY21, the group paid a total dividend of USD 1.710 million, higher than USD 1.118 million in pcp. Despite the current economic cycle, the company has increased its dividend distribution, which is commendable. The stock was offering a dividend yield of ~3.7%, which looks impressive considering the persisting interest rate scenario. 

• Increase in profitability and Reduction in Debt: The company recorded a 10% decline in its total debt to USD 53.609 million in Q1FY21. This is encouraging, considering the current economic scenario, as most of the companies are increasing their leverage in order to retain liquidity levels. A reduction in total debt would lead to lower finance costs. Moreover, the company reported higher profitability in the recent past, wherein adjusted EBITDA stood at USD 25.132 million in Q1FY21, significantly higher than USD 18.558 million in pcp.

Q1FY21 Financial Highlights:

• DR announced its quarterly result, wherein the company posted total revenue and other income of USD 98.1 million, depicting a growth of 5.8% on y-o-y basis. The increase was driven by higher income from the Facility service segment.

Source: Company Report

• The group lowered its operating expense to USD 79.770 million, from USD 81.727 million in pcp, reflecting a 2.4% drop over the previous corresponding period (pcp). The decline was primarily due to lower general and administrative expenses (USD 13.851 million v/s USD 15.652 million in pcp), and lower depreciation and amortization expenses, partially offset by higher salaries and benefits costs (USD 29.053 million v/s USD 28.587 million in pcp).
• Income from operations soared to USD 18.359 million v/s USD 11.035 million in pcp.
• Net income stood at USD 10.307 million, declined from USD 14.607 million in Q1FY20. The decline was majorly due to a loss from the change in value of exchangeable interest liability amounting to USD 1.948 million, as compared to an income of USD 7.027 million in pcp.
• The group reported cash and cash equivalents of USD 58.006 million, while total assets were recorded at USD 441.183 million.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Due to any restrictions imposed by the Federal Government, the company might witness a hindrance in its Facilities, which might take a toll on the overall company’s performance.

Stock Recommendation:

The company has a resilient business model supported by a growing population of aged people (more than 65 years), which is expected to the increased the need for healthcare services and facilities in the coming days.                            

Source: Company Presentation

On the valuation front, the stock is available at a forward EV to Sales multiple of 0.5x which is lower than the industry median of 2.1x. Hence, considering the aforesaid facts, we give a ‘Hold’ rating on the stock at the closing price of CAD 7.42 on May 14, 2021.

One-Year Price Chart (as on May 14, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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