Can TC Transcontinental Recover?

TCL.A - Transcontinental Inc

Transcontinental Inc is Canada’s largest printing company and a leader in flexible packaging in North America. It is also a leader in specialty media segments in Canada.

Transcontinental operates through printing (more than 57% of 2018 revenues), packaging (38%) and media (5%) segments. The company has operations in Canada, the United States and Latin America. Transcontinental operates through a large national printing network and has 28 production and 16 printing plants in Canada. Its media division is Canada’s largest publisher of French language educational resources.

As a leading printer in Canada, Transcontinental provides a broad range of solutions. Newspapers, magazines, books and marketing products account for nearly 40% of the company’s printing revenues. The company provides innovative solutions in both printing and packaging segments. It specializes in flexographic printing, lamination of plastic films, and offers print solutions for flyers, newspapers, magazines, and mass marketing products. Transcontinental diversified into packaging in 2014. The company also provides a broad range of innovative flexible packaging solutions.

Investment Data

Revenue Growth & Market Exposure

With 40 years of experience under its belt, Transcontinental has successfully met its customers’ evolving and transforming needs. As a result, the company has been transforming its business. It is investing to build a North American flexible packaging platform pursuing a diversified strategy. It is also developing its non-advertising based specialty media offering for the business, finance and construction sectors.

Transcontinental caters to a diverse mix of customers including retailers and publishers. Some of the most prominent names on its customer list are Loblaws, Metro, Sobeys, Home Depot, Walmart, Globe and Mail, Rogers, etc. The company has developed sticky customer relations with major retailers over the years. Multi-year agreements, as well as recurring orders in retailer-related services (accounting for 60% of revenues of the printing division), grant cash flow visibility to the company.

In its printing segment, the company is looking at gaining market share by improving its efficiencies and managing long-term contracts. Transcontinental is targeting growth in its packaging division through acquisitions as well as organic growth. The acquisition of Coveris Americas last year strengthened the Transcontinental market share in the flexible packaging sector. In Q1’19, Coveris Americas contributed $306 million to the company’s overall revenues.

Transcontinental has developed deep expertise in manufacturing and distribution of print and digital content. It is difficult for new entrants to challenge its leadership position in these markets due to long standing industry connections. This also gives Transcontinental an edge over the competition to increase its share of in-store marketing services with key retailers/ customers.

Dividends

Transcontinental is a Canadian Dividend Aristocrat and Dividend Ambassador paying and raising its dividend for the last 25 years. It is one of Canada’s best dividend growth stocks. The company has achieved a dividend CAGR of 10.3% annually over the last decade. It last raised its dividend by 4.8% and also paid a special dividend in 2013. Transcontinental sports an attractive dividend yield of 5.5% and has a reasonable payout ratio of 40%.

In total, the company has paid $287 million in dividends over the past five years and has deployed more than $45 million in share buybacks.

Transcontinentals’ presence in allied printing and packaging segments allows the company to explore new opportunities across multi platform businesses. The company is targeting growth through the expansion of its specialty multi platform offerings and a variety of sources in the media sector.

Coveris Americas’ acquisition should also drive long term growth for the shareholders. Since its transformational phase over the last five years, Transcontinental has been able to deliver improved adjusted profitability. Its packaging segment now accounts for 38% of its consolidated revenues up from just 2% back in 2014. The company generates enough cash to deploy toward strategic acquisitions and transformational activities. In fact, the flyer business is its biggest cash cow. However, the company’s indebtedness has also significantly increased during recent years.

TCL.A - Acquisition History
Source: Transcontinental

Transcontinental has demonstrated solid financial achievements over the years. The company’s excellent performance and strong balance sheet should aid the company to grow dividends at a single-digit pace in the future.

While TCL.A has done good with numbers so far, the dividend yield is out of line with the sector and industry and that should be a big warning sign – high yield have risks attached.

Competition

The packaging industry is highly competitive. The company competes with large integrated companies in the packaging segment as well as other foreign competitors in the printing industry. Transcontinentals’ printing segment suffers heavy competition from the advent of the internet. Postmedia Network Canada, Torstar Corp. are few of Transcontinentals’ leading competition. The acquisition of Coveris Americas has granted Transcontinental a major competitive edge in the lucrative flexible packaging industry.

Bottom Line

Catering to its customers’ evolving needs and driving customer satisfaction through innovative solutions have been the major areas of Transcontinentals’ focus. As a result, the company has developed sticky client relationships with long-term contracts over the years. The company’s focus on flexible printing and its strategy to transform into a diversified organization through acquisitions and organic growth should help in increasing its market share. A reasonable payout ratio also indicates enough room for future growth.

While the business looks strong, the stock price is showing it’s not understanding the acquisition or the price it paid for it. Read comments on Stockchase from analysts on BNN to get some opinions. The acquisition has shaken up the company and investor want predictability and they don’t see it. A stock always trade on its future potential and one day, if the potential doesn’t materialize, the stock price will align itself to reality and I believe the price is reflecting the challenges with the integration of the acquisition.

If you have a position, don’t focus on the lost but on where to go from here. Do you wait and for how long? Do you take your money elsewhere to get back up faster? If you do not have a position, it’s prudent to wait for the business pivot into packaging to be done.

TCL.A vs Index

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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