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

DBRS Limited (DBRS) 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 stability in the Company’s earnings and financial profile while acknowledging the divestitures in a portion of the Company’s Media segment. The ratings continue to reflect Transcontinental’s strong market position in its Printing, Packaging and Publishing businesses, strong free cash flow (FCF)-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 continued to benefit from divestitures of low return Media assets, growth in the Packaging segment and cost containment efforts over the past year. Although the sale of Media assets during the year reduced the absolute revenue, EBITDA and the EBITDA margin were both positively affected. Absolute revenue declined by 0.6% to $2.0 billion in F2017; however, EBITDA margins improved modestly to 21.0% in F2017 from 20.6% in F2016. As such, EBITDA increased to $421 million in F2017 from $416 million in F2016.

FCF before changes in working capital posted an increase to $229 million in F2017, from $173 million in F2016 that was primarily attributable to lower income taxes paid in F2017, which was due to the loss of carryforwards, a material decline in capital expenditure (capex) (caused by divesting capital-intensive Media assets) and essentially flat dividends. Modest EBITDA growth, combined with stable gross debt levels, resulted in a slight improvement in credit metrics. Lease-adjusted debt-to-EBITDA and lease-adjusted EBITDA coverage ratio improved to 1.18 times (x) and 16.3x, respectively, in F2017, from 1.22x and 15.6x, respectively, in F2016.

DBRS expects Transcontinental’s earnings profile to remain at least stable over the near to medium term. DBRS expects revenue to decline in the high-single digits to approximately $1.8 billion in F2018 mainly due to divestitures. Despite a year-over-year (YOY) decline in revenue, DBRS expects F2018 EBITDA margins to remain relatively stable YOY at around 21% as the Printing segment-margin pressure essentially offsets the Media segment margin, which improved as a result of asset divestitures. DBRS forecasts EBITDA to decline to between $350 million to $400 million in F2018. That said, the Company’s business strategy of divesting low profit, non-core assets and acquiring higher growth and return packaging assets should improve profitability over the longer term while recognizing risks associated with growth through acquisitions.

Transcontinental’s very strong financial profile will continue to be based on its free cash generation and relatively modest financial leverage. DBRS expects cash flow from operations to track operating income and be $275 million to $300 million in F2018. Capex and dividends are expected to remain roughly flat YOY. As such, DBRS forecasts FCF before changes in working capital to decline modestly to between $175 million and $200 million in F2018. Given Transcontinental’s low level of leverage, FCF is likely to be allocated to acquisitions in support of the Company’s business strategy. DBRS’s view of Transcontinental’s credit risk profile is based on the strength and stability of the Company’s earnings profile, not the Company’s debt level as financial metrics are extremely strong for the current rating category.

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

The principal methodologies are Rating Companies in the Printing Industry (March 2017) and Rating Companies in the Publishing Industry (March 2017), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.