Jim Zimmerman of Lowell Capital Management presented his in-depth investment thesis on Transcontinental (Toronto: TCL) at Wide-Moat Investing Summit 2018.

Thesis summary:

Transcontinental engages in print, flexible packaging, publishing, and digital media operations in Canada and the U.S. TCL is the largest printer in Canada and a key supplier of flexible packaging in North America and recently completed a transformational acquisition in flexible packaging. TCL has been written off over the last several years as a declining printer with no growth potential, and the recent multiple continues to reflect this sentiment. As one looks closer, it becomes evident that TCL has an excellent management team with a compelling strategy (still partially executed) to create a strong, resilient and sustainable business over the long-term. It is becoming clearer that TCL could become a major player in flexible packaging in North America 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.

TCL completed a transformative acquisition of Coveris Americas for C$1.7 billion in May 2018. Coveris generated ~C$1.26 billion in revenue and ~C$165 million in adjusted EBITDA for FY2017. The Coveris Americas acquisition makes TCL one of the top ten flexible packaging converters in North America, among Bemis, Sealed Air, Berry, and Print Pak. On a pro forma basis for 2017, TCL’s revenue is ~C$3.3 billion, operating income is ~C$362 million, and adjusted EBITDA is ~C$564 million. Packaging will represent ~48% of revenue, 23% of operating income, and 37% of adjusted EBITDA. Jim expects TCL to rapidly deleverage the balance sheet over the next two years. Net debt to adjusted EBITDA is ~2.7x at closing, expected to decline below 2x over the next 24 months.

Over the past six years, TCL has generated cumulative cash from operations of close to C$2 billion or ~90% of enterprise value prior to the Coveris Americas acquisition. Pro forma for Coveris, TCL is attractive at 1.3x revenue, 7.5x 2017 EBITDA, and a 9% unleveraged FCF yield. Pro forma for Coveris, TCL’s adjusted net income per share is ~C$3, so TCL trades close to 10x adjusted EPS. The print segment is a better business than most investors realize – adjusted operating income from the print segment has grown from C$185 million in 2008 to C$295 million in 2017.

TCL has ~88 million Class A and Class B shares trading at ~C$32 per share for a market cap of ~C$2.8 billion. Class B shares are controlled by the Marcoux family of Canada. After the Coveris America acquisition and a follow-on 10 million share Class A stock offering to help finance the acquisition, TCL has ~C$1.5 billion of net debt, resulting in EV of ~C$4.3 billion. If TCL grows the packaging segment and print segment results remain relatively stable, investor perception could improve. TCL could achieve C$600 million in adjusted EBITDA by 2020 and trade for 8.5x adjusted EBITDA or EV of ~C$5.1 billion. TCL could reduce net debt to ~C$1 billion by yearend 2020. Based on net debt of ~C$1 billion and 88 million diluted shares outstanding, TCL stock could trade for ~C$47 per share, or close to 50% higher than the recent price of C$32 per share.

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About the instructor:

Jim Zimmerman is founder and portfolio manager of Lowell Capital Value Partners, LP, successor fund to Lowell Capital Fund, L.P. Mr. Zimmerman managed Lowell Capital Fund L.P. from 2003 to 2015 employing a proprietary strategy laser-focused on smaller and/or misunderstood companies with large, sustainable free cash flow yields and “Ft. Knox” balance sheets. He generated a compound annual return significantly exceeding the HFRI Equity Hedge Index and the S&P 500 Total Return Index over this period, despite holding a significant net cash position (~30%) for most of this period. He has over 25 years of investment banking and investment management experience in a variety of industries and has been involved with several billion dollars of investments. He has been a member of the invitation-only Value Investors Club for over 10 years, contributing detailed investment write-ups on 35 companies to date which have produced an average return exceeding 50% per investment. He has built an extensive network of relationships with value-oriented investment groups and activists. Mr. Zimmerman graduated with a BA with high honors in economics from Princeton University in 1980 and an MBA from Stanford Business School in 1984. He worked at Drexel Burnham Lambert, Inc., 1984 to 1990, serving in the Corporate Finance Department and multiple other investment banks from 1990 to 2003. He is a close follower of Warren Buffett and his investment approach.