Transcontinental: Underappreciated Resiliency and FCF Generation

Jim Zimmerman of Lowell Capital Management presented his in-depth investment thesis on Transcontinental, Inc. (Canada: TCL-A) at Wide-Moat Investing Summit 2020. Jim’s daughter, Abby Zimmerman, also participated in and contributed to the presentation.

Thesis summary:

Transcontinental engages in the flexible packaging business in Canada, the U.S., Latin America, the U.K., 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 as well as manufacturing flexible plastic and paper products. The printing segment provides integrated services for retailers, such as pre-media services, flyer, and in-store marketing product printing.

TCL has ~87 million shares outstanding at a recent price of C$14 per share, for a market cap of C$1.2 billion, and a net debt position of C$950 million as of April 2020, for an enterprise value of C$2.1 billion. TCL recently traded close to 4x adjusted EBITDA.

Jim believes the company can sustainably generate FCF of C$250+ million, which would result in an unlevered FCF yield of 12%. TCL has an improving balance sheet, with net debt reduced from C$1.4 billion after the Coveris acquisition in mid-2018 to about C$950 million as of April 2020. TCL could achieve adjusted EBITDA of C$500 million by 2022 and trade for 6x adjusted EBITDA or C$3 billion less C$800 million of net debt for a market cap of about C$2.2 billion or C$25 per share, as compared to a recent stock price of C$14 per share. TCL pays C$0.87 per share in annual dividends (7% yield), which appears sustainable based on strong cash flow.

TCL-A achieved a strong quarter for April 2020, with both the packaging and printing segments showing resilient performance amid COVID. The packaging segment expects organic growth in H2 2020, and the printing segment is recovering with a reopening of Canada’s economy. The printing segment is a stronger business than the market is giving it credit for, as its flyers are an essential tool for major retailers to drive sales.

Jim believes TCL’s recent market valuation misprices the resiliency of both the packaging and the printing segments. Packaging companies trade at much higher multiples, and as TCL’s packaging segment grows, TCL’s multiple should move up accordingly.

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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. Jim 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.

Jim 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.

Jim 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.

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