National Bank While Transcontinental Inc.’s flyer business faces a significant threat following a Quebec Superior Court ruling this week, National Bank Financial Adam Shine thinks the share price reaction has been “grossly overdone.”
On Wednesday, the Montreal-based packaging and printing company said it plans to appeal a ruling that denied its motion to overturn a Mirabel byline requiring consumer to request its flyers, referred to Publisac. If maintained, it said it would lead to the end of the distribution, citing a “unprecedented rise in prices.”
“Retail flyer distribution revenues across Quebec are less than $100-million with an EBITDA margin in high single digits,” said Mr. Payne. “Montreal accounts for 20-25 per cent of total, so the revenue hit isn’t big and profit impact is immaterial. That said, TCL wouldn’t want to see collateral implications for retail distribution and flyer printing elsewhere in its footprint. Using a 5-times multiple for Printing, the 2022E value of the flyer business is $6.20 per share. More municipalities may follow Mirabel & Montreal, but the whole operation isn’t likely to be abandoned in short order and not without efforts to continue printing the flyer and exploring alternative distribution strategies (Canada Post 3 times more expensive than Publisac) while also considering material job losses.”
After reducing his discount applied to the flyer business, Mr. Payne cut his target for Transcontinental shares to $23 from $24.50 with an “outperform” rating. The average is $23.08.
“Our target is based on our fiscal 2023 estimated NAV (fiscal 2022 estimate $18.64) with implied EV/EBITDA of 6.6 times fiscal 2022 estimates and 5.9 times fiscal 2023,” he said. “If we wiped away the flyer business, our NAVs would drop to $15.50 & $20. This is excessive. Extrapolating TCL’s share price to fiscal 2023 estimates implies no value for flyers and a sub-2-times multiple on Printing which makes no sense. TCL’s story doesn’t hinge on flyers, but rather the scaling of Packaging and growth areas in Printing.”