DBRS Confirms Ratings of Transcontinental Inc. at BBB (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Transcontinental Inc. (Transcontinental or the Company) at BBB (low) with Stable trends. The rating confirmations reflect the Company’s relatively stable earnings and financial profile while acknowledging further progress in earnings diversification over the course of the past year. The ratings continue to reflect Transcontinental’s strong market position in its Print and Publishing businesses, strong free cash-generating capacity and modest financial leverage. The ratings also continue to consider the structural shift from print to digital media and the risks associated with growth through acquisitions.

Transcontinental’s earnings profile continues to be challenged with consolidated revenue remaining relatively flat in F2016 at $2,020 million. Revenue in the Packaging segment benefited from the acquisitions of Robbie Manufacturing (Robbie) and Flexstar Packaging Inc. (Flexstar), offsetting negative organic growth in the Media and Printing segments. That said, EBITDA grew to approximately $390 million in F2016 as a result of rationalization in the Media and Printing segments as well as contribution from acquisitions in the Packaging segment. The Company continued to grow its free cash flow after dividends and before changes in working capital, increasing to approximately $179 million in F2016. Transcontinental used the bulk of its free cash flow to finance the acquisitions of Robbie and Flexstar. Modest growth in EBITDA and relatively stable debt levels contributed to relatively stable credit metrics with lease-adjusted debt-to-EBITDA of 1.30 times (x) and lease-adjusted EBITDA coverage of 14.65x in F2016 compared with 1.37x and 14.16x in F2015, respectively.

DBRS expects Transcontinental’s earnings profile to remain relatively stable and sufficient to support the current rating with top-line revenue expected to remain relatively flat in F2017. In the Media segment, DBRS expects revenue to decline in the high-single digits, driven by the sale of the Company’s digital marketing solutions business and the continued challenges in local newspaper advertising. In the Printing segment, DBRS forecasts revenue to decline in the low-single digits because of organic declines in commercial print as well as newspaper and magazine printing. DBRS forecasts organic growth in the mid-single digits in the Packaging segment in addition to the annualized impact from the Robbie and Flexstar acquisitions in F2016. DBRS expects that cost-containment efforts and a greater proportion of revenues derived from higher-margin packaging will result in EBITDA growing to approximately $400 million in F2017.

DBRS believes that Transcontinental’s financial profile will continue to benefit from its stable operating income, significant free cash flow and relatively modest financial leverage. DBRS forecasts free cash flow after dividends and before changes in working capital to grow and approach nearly $250 million in F2017. DBRS expects the Company to use its free cash flow primarily for acquisitions, particularly in the Packaging segment. Relatively stable debt levels, combined with modest growth in operating income, should result in stable credit metrics that are appropriate for the current rating category.

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.

The principal methodologies are Rating Companies in the Printing Industry and Rating Companies in the Publishing Industry, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.