We focus on smaller companies with “Ft. Knox” balance sheets and large & sustainable free cash flow yields and we are typically seeking a double-digit FCF yield or higher or an unleveraged basis. The objective is for the sustainable FCF to eventually drive up the share price to a more reasonable valuation through share buybacks, debt reductions, dividends, or accretive acquisitions. Obviously, it is important we have a management team that cares about shareholder value. We focus on small-cap stocks because there is a much better chance to find an attractive investment opportunity which is under-followed or undiscovered.
Transcontinental, Inc. (TCL) is a leader in flexible packaging in North America, Canada’s largest printer, and the leading Canadian publishing group of French-language educational resources. The Company operates through three segments: Packaging, Printing, and Other. The Packaging segment engages in the extrusion, lamination, printing, and converting packaging solutions. This segment serves dairy, coffee, meat and poultry, and more. The Printing segment provides integrated services for retailers, such as premedia services, flyer and in-store marketing product printing, and door-to-door distribution. The Other segment is involved in printing and digital publishing of educational books, and specialized publications for professionals in French and English. TCL is a family-controlled business founded in 1976.
TCL’s shares currently trade at about C$15 per share with about 87m fully diluted shares for a market cap of about C$1.3b. TCL has a reasonable balance sheet with a net debt position of about C$0.95b about 2.2x LTM adjusted EBITDA. The Company has a highly cash-generative business model. The Company’s cash from operations has represented a majority percentage of adjusted EBITDA in every year since 2008. In 2019, TCL generated about C$430m of cash from operations. TCL has an unleveraged FCF yield of close to 11%. Over the last six years, TCL has generated cumulative cash flow from operations of close to C$2b, or about 100% of the enterprise value (EV).
For over 40 years, TC Transcontinental’s mission has been to create products and services that allow businesses to attract, reach, and retain their target customers. In 2019, they generated $3.0 billion in revenues, had about 8,500 employees, as well as 40 operating facilities. The TCL vision is to become a market leader in flexible packaging in North American while maintaining their position as Canada’s largest printer and as the leading Canadian French-language educational publishing group.
TCL has a three-pronged strategy. First, they strive to grow their Packaging Sector through organic sales growth and acquisitions. Second, they want to optimize their printing platform and capture growth opportunities in promising verticals. And lastly, they want to grow their book publishing and Groupe Constructo activities through organic growth and acquisitions.
TCL has been written off as a declining printer with no growth potential and we believe the current multiple continues to reflect this sentiment. As one looks closer, it becomes evident that TCL is a major player in flexible packaging in North America and continues to grow in this segment over the next five years. TCL is using the strong and steady cash flows of its unique Print Segment to position itself as a major player in flexible packaging in North America. We believe TCL has revenue growth potential as it expands into a growing flexible packaging industry. The flexible packaging industry is expected to grow about 5% per year over the next five years.
We believe TCL is attractive at current prices trading at 0.7x revenues, 5x EBITDA, and an 11% unleveraged FCF yield. We believe its Printer Segment is a better business than most investors realize – Print Segment includes a unique business model printing flyers and in-store displays for major Canadian retailers, which has enabled industry outperformance to date.
We believe if TCL grows its Packaging Segment and Print Segment results remain relatively stable, investor perception could further improve. We believe TCL could achieve C$500m in adjusted EBITDA by 2022 and trade for 6x adjusted EBITDA or an EV of about C$3b, with net debt of about C$800m for a market cap of about C$2.2b. Based on 87m diluted shares outstanding, we believe TCL stock could trade for about C$25 per share, or close to 70% higher than the current price of C$15 per share.
TCL is the largest printer in Canada and has a state-of-the-art network of printing plants and one of the lowest cost structures in the industry. TCL cost structure and modern equipment and geographic locations enable it to provide unique service capabilities to its customers that other prints find difficult to match. Major retailers in Canada depend heavily on flyers to drive customers into their stores and these retailers have long-term relationships with TCL. TCL also provides unique in-store printing capabilities for these retailer customers.
Transcontinental Inc. engages in the flexible packaging business in Canada, the United States, Latin America, the United Kingdom, Australia, and New Zealand. It operates through three segments: Packaging, Printing, and Other. The Packaging segment engages in the extrusion, lamination, printing, and converting packaging solutions; and manufacturing flexible plastic and paper products, including roll stock, bags and pouches, coextruded films, shrink films and bags, and advanced coatings. This segment serves dairy, coffee, meat and poultry, pet food, agriculture, beverage, confectionery, industrial, and consumer product markets, as well as supermarkets. The Printing segment provides integrated services for retailers, such as premedia services, flyer and in-store marketing product printing, and door-to-door distribution, as well as print solutions for magazines, four-color books, and personalized and mass marketing products. The Other segment is involved in printing and digital publishing of educational books, and specialized publications for professionals in French and English. Transcontinental Inc. was founded in 1976 and is headquartered in Montreal, Canada.
TC Transcontinental Packaging
The vision for the Packaging sector is to become a market leader in flexible packaging in North America. The strategy for the Packaging sector is to grow the sector through organic sales growth and acquisitions. They have 25 production plants worldwide, mainly in the United States, Canada, and Latin America.
TCL packaging has significant traction in growing profitability. Adjusted EBITDA margins grew from 11.9% in FY2018 to 12.8% in FY2019, a 90bps improvement. Additional cost synergies are expected in FY2020 from internalization of film and plates, on plan to exceed the initial cost synergy target of $20 million US. TCL is striving to establish leadership in sustainability and the circular economy for plastics.
The Packaging sector serves a variety of core markets. This includes agriculture, beverage, candy, dairy, coffee, home and personal, pet food, and meat and poultry. TCL invests in innovative and eco-responsible products to become the market leader in core markets.
Flexible Packaging Serves an Important Purpose
The key function of a package is to contain and protect the product. Packaging also extends shelf life. Packaging accounts for about 10% of the carbon footprint of a product. About â of all food produced is disposed of before it is consumed so packaging is identified as one of the solutions to reduce food waste. The benefits of flexible packaging include that it is lightweight, optimizes transportation, and offers significant improvement in shelf life.
Impact of COVID-19 on Packaging Activities
While not immune to economic downturn or crisis, the Packaging sector typically performs well in these occasions. This sector plays a crucial role in food, beverage, and other essential consumer staples. These products are more important than ever and essentially all of our products and packaging are for home consumption. Their focus is to manage the strong order uptake and ensure they can support their customers by optimizing capacity and keeping their employees healthy and safe. Over the last few months, the sales team has been operating remotely, but in close contact with customers. This is a strong opportunity for the Company to demonstrate the resilience of the packaging business.
TCL is focused on manufacturing efficiency and realizing a second wave of synergies (internalization of film and plates) to continue to gradually improve margins. TCL realized adjusted EBITDA margin of 16.0% in Q2 2020. TCL seeks to generate long-term organic sales growth. Their consolidated platform has the capacity to accommodate additional volume. They also want to continue to strengthen their packaging portfolio. TCL expects modest organic revenue growth in fiscal 2020, followed by more significant growth as of 2021.
TC Transcontinental Printing
The vision in the Printing sector is to maintain their position as Canada’s largest printer. Their strategy is to optimize their printing platform and capture growth opportunities in promising verticals. They have 16 state-of-the-art printing plants, from coast to coast.
The Printing sector provides a broad range of printing solutions for many industries. This includes marketing products, publishing, retail, and premedia and distribution.
In 2019, TCL announced the closure of Brampton and PEI plants, providing more than $12 million in annual cost savings. FY2019 Adjusted EBITDA was $268 million. TCL simplified overhead structure to reduce indirect costs. They did an acquisition of Holland & Crosby to increase their presence in a growth vertical. TCL states they will continue to take action to ensure they generate strong free cash flow in the printing sector.