Can TC Transcontinental Recover?

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. 

The company operates through printing (more than 42% of 2020 revenues), packaging (55%), and media (3%) segments. Transcontinental diversified into packaging in 2014. It has operations in Canada, the United States, and Latin America. Transcontinental operates through a large national printing network and 40 operating facilities, including 12 printing plants, in North America. Its media division is Canada’s largest publisher of French-language educational resources. 

As a leading printer in Canada, it provides a broad range of solutions. The company offers 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.

The company also provides a broad range of innovative flexible packaging solutions. Some of its core markets are agriculture, beverage, candy and confectionary, cheese and dairy, home and personal care, and pet food.

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Revenue Growth & Market Exposure

With 45 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 and is making good progress in this direction.

Transcontinental is also developing its non-advertising-based specialty media offering for the business, finance, and construction sectors. The Media sector now represents 3% of Transcontinental’s consolidated revenues. Transcontinental is a leader in most of its verticals. As a result, the company’s revenues have become more balanced over the years.

In its printing segment, the company is looking at gaining market share by improving its efficiencies and managing long-term contracts. Transcontinental is targeting to increase its revenue base from growth segments to more than 80% from just 23% in 2016.

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, grant cash flow visibility to the company. 

Transcontinental is targeting growth through acquisitions as well as organic growth and has built an extensive packaging platform through several strategic acquisitions. The acquisition and successful integration of Coveris Americas strengthened the Transcontinental market share in the flexible packaging sector. As a leader in flexible packaging in North America, the company has increased its share of revenues from this sector from 2% to 55% of consolidated revenues in only five years. Transcontinental continues to benefit from its transformation into flexible packaging.

Transcontinental’s packaging segment benefited from increased customer demand for food and everyday consumer products packaging in the U.S., Latin America, and Canada amidst the pandemic. The company’s revenues have grown at ~10% CAGR In the last three years. It has invested more than $10 million in its book printing platform to meet the demand from North American customers in the last year. Transcontinental is estimating revenue growth from verticals like in-store marketing products, book printing, and pre-media services. The company is expecting organic growth of more than 2% in FY21.

Dividends

Transcontinental is a Canadian dividend aristocrat paying and raising its dividend for more than 25 years. It is one of Canada’s best dividend growth stocks having a history of dividend growth. The company has achieved a dividend CAGR of ~10% annually over the last decade. It last raised its dividend by 2.3% in 2020. Transcontinental sports an attractive dividend yield of 4% and has a reasonable payout ratio of 51% which indicates enough room for future growth. The company paid ~$78 million in dividends in the last year and it also has a share buyback program in place. 

Its presence in allied printing and packaging segments allows the company to explore new opportunities across multi-platform businesses. Its acquisitions should also drive long-term growth for the shareholders. Since its transformational phase over the recent years, Transcontinental has been able to deliver improved adjusted profitability.

The company generates enough cash to deploy toward strategic acquisitions and transformational activities. In fact, the flyer business is its biggest cash cow. Transcontinental has demonstrated its ability to deleverage rapidly. It has reduced its net indebtedness, which had increased significantly with the acquisition of Coveris Americas, by ~$700 million since 2018.

Transcontinental’s cost-cutting and operational efficiency should mitigate the impact of any volume declines in its Printing business. The company’s packaging business is also poised to gain as most of its operations support the retail supply chain for food and everyday consumer products.

The company realized more than US$20 million in annual cost synergies in the first two years of the Coveris acquisition and expects additional synergies in FY2021. The company also expects to continue generating significant cash flows from all its activities to support business acquisitions and reduce indebtedness. Transcontinental’s focus on promising markets, investments in advanced equipment, and strategic acquisitions position it well for future growth.

Transcontinental’s presence in allied printing and packaging segments allows the company to explore new opportunities across multi-platform businesses. Its acquisitions should also drive long term growth for the shareholders. Since its transformational phase over the recent years, Transcontinental has been able to deliver improved adjusted profitability.

Transcontinental (TCL.A) historical yield
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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. The printing segment suffers heavy competition from the advent of the internet. Postmedia Network Canada, Torstar Corp. are a few of Transcontinental’s leading competitors.

The company has developed deep expertise in the manufacturing and distribution of print and digital content. It is difficult for new entrants to challenge Transcontinental’s leadership position in these markets due to its long-standing industry connections. This gives Transcontinental an edge over the competition. The acquisition of Coveris Americas has further granted the business a major competitive edge in the lucrative flexible packaging industry. 

Its printing segment suffers heavy competition from the advent of the internet. Postmedia Network Canada, Torstar Corp. are few of Transcontinental’s leading competitors. The acquisition of Coveris Americas has granted the business a major competitive edge in the lucrative flexible packaging industry.

Bottom Line

Transcontinental has a sound track record of continuous improvement and manufacturing excellence. The company is well-positioned to grow organically in the Packaging business and to gain from a gradually recovering Print business in a post-pandemic world.

It continues to record organic growth on the back of improving profitability, operational efficiency gains, and better than expected synergies. The integration of Coveris Americas positioned the company as a leader in flexible packaging in North America and it has successfully built a flexible packaging platform. The company should also continue to strengthen its packaging portfolio with focused acquisitions.

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