DBRS Confirms Transcontinental, Inc. at BBB (low), Stable Trend

DBRS Limited (DBRS) has confirmed the Issuer Rating and Senior Unsecured Debt rating of Transcontinental, Inc. (Transcontinental or the Company) at BBB (low), both with Stable trends. DBRS has also discontinued its rating of the Preferred Shares issued by the Company, as they were redeemed. The rating confirmations reflect Transcontinental’s strong market position in its printing and publishing businesses and acknowledges the Company’s expansion into new business lines. The rating confirmations also consider the weak prospects of growth in the printing and publishing industries consequent to a structural shift from print to digital media. The ratings also continue to be supported by the Company’s modest financial leverage and relatively robust free cash flows.

Transcontinental’s revenue declined 1.3% year over year to $2.06 billion in F2014, primarily because of lower advertising spending and divestiture of Rastar’s assets; however, the Company’s EBITDA improved notably to 17.4% versus 16.1% in F2013 as a result of cost reduction initiatives. The Company achieved 1.0% year-over-year growth in revenues in Q1 2015. This reflects the acquisitions of Capri Packaging and Québec weekly newspapers and the contribution of new printing and distribution agreements signed in F2014, offset by lower advertising revenues in consumer magazine publishing and lower marketing products printing activities. The Company’s revenues and margins in Q1 2015 also continued to benefit from the appreciation of the U.S. dollar against the Canadian dollar.

DBRS notes that Transcontinental has undertaken a strategy to diversify away from its advertising-dependent businesses by investing in relatively less cyclical, higher growth profile businesses. This led to Transcontinental’s acquisition of Capri Packaging. Transcontinental raised $250 million of debt to finance its future acquisitions, repurchase $100 million of preferred shares and repay higher cost debt. Consequently, gross debt-to-EBITDA increased moderately to 1.30x (LTM) from 1.03x in F2013.

Going forward, DBRS believes that print revenues may erode moderately due to lower volumes in newspaper, magazine and color book printing contracts. Organic publishing revenues are likely to be moderately negative due to a weak advertising market. DBRS expects that Transcontinental’s recently acquired packaging operations and Sun Media’s newspapers will more than offset the organic declines and result in low-single-digit revenue increases in F2015. EBITDA margins should expand slightly in F2015 as a result of cost-containment efforts and a shift towards higher margin packaging.

DBRS expects operating cash flow to remain relatively stable in F2015. Capital expenditure is likely to be marginally lower in F2015, with spending likely to be lower in print and media, but higher in corporate information technology. Dividends payout is expected to remain in line with earnings. As such, DBRS expects the Company to generate healthy free cash flow (before working capital changes) in F2015 of approximately $200 million, which the Company is likely to use to continue investing in growth and to reduce debt. Consequently, Transcontinental’s financial profile will continue to benefit from its relatively moderate debt levels and remain stable over the near to medium term.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Printing Industry (May 2015) and Rating Companies in the Publishing Industry (May 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related
Research at the right of the screen or by contacting us at info@dbrs.com.