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Transcontinental Inc March 09

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McGill team presentation on Transcontinental Inc, March 2009

McGill team presentation on Transcontinental Inc, March 2009

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  • One of the valuation method we use is two stage DCF method. The following are the assumption that we made during our valuation.During first stage, estimated growth rates of each SBU’s separately.Wacc we used 11% until 2013 and drop to 10% during terminal stage Terminal growth rate that we used 2.75%
  • These are the parameters that we used to calculate WACCCost of debt is high due to market condition and we expect goes down during the terminal stage as TCl stabilizes
  • Our model predicted TCL revenue slight goes down next two year due to recession and then goes up. Similar effect appear in EBITDA as well in next two years. We are forecasting negative cash flow this year due to capex and debt repayment 300 mil in total.
  • Second valuation method we used is comparables. We took their closest competitors in three of their strategic business units separately and we calculated their EV/EBITDA and we weighted average of three SBU’s
  • These are the EV/EBITDA multiples of the three sectors currently trading at. As I mentioned earlier blended average of the industry is 5.24, which we used in our valuation. As you can see TCL EV/EBIDA multiple is at 4.1, we believe transcontinental is undervalued specially in publishing and marketing sector.
  • We gave equal weightage importance to both DCF and comparable valuation methods. Our estimated price is 13.50 Canadian dollars.

Transcript

  • 1. Offering consistent value during a financial meltdown Maxime Brunet | Sachin Karnakote | Anushree Mohta | Kapil Prakash | Raja Uppuluri
  • 2. Investment Opportunity Strong Attractive Balance Sheet Valuation Buy Balanced Industry Portfolio Leader Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 2
  • 3. Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A
  • 4. Company Overview Largest printer and one of the largest publishing companies in Canada Operations in Canada, United States and Mexico More than 13,500 employees Reported revenues of CAD2.4 billion in FY2008 Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 4
  • 5. Revenues for 3 SBUs Marketing C$1,252 Publishing C$647 Printing C$624 Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 5
  • 6. Strategic Business Units Regional Educational Newspapers Resources Management Magazines Books Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 6
  • 7. Strategic Business Units (2) SFC, NYT, G Flyers and &M, Metro Inserts and others Catalogues, Plants across Books, North America Financials Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 7
  • 8. Strategic Business Units (3) Website Database Development Analytics Direct Fulfillment Marketing Mailing Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 8
  • 9. Management Founded in 1976 by Rémi Marcoux (Current Chairman) Control has always been in the family Marcoux family retains 82% of the Class-B control shares Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 9
  • 10. Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A
  • 11. Macro Analysis Key Issues Effects 1 Long term contracts ↑ Revenues 2 Acquisitions ↑ Revenues & Market Share 3 Market conditions/Growth ↓ Margins & ↓ Market Size 4 Change in FX ↑ Costs & ↓ Margins Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 11
  • 12. Profitability Management & State of the art technology Barriers to entry Unionized Workforce Economies of scale & Pricing Power Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 12
  • 13. Financial Flexibility Stable Management Good relationships with bankers Long term cash flows High CAPEX Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 13
  • 14. Historical Performance C$30 C$25 C$20 C$15 C$10 C$5 C$0 11/2000 11/2003 11/2005 11/2007 11/1999 11/2001 11/2002 11/2004 11/2006 11/2008 Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 14
  • 15. Dividends Payout 97-08 C$0.31 C$0.28 C$0.25 C$0.21 C$0.17 C$0.14 C$0.12 C$0.10 C$0.10 C$0.08 C$0.08 C$0.06 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 15
  • 16. Fundamentals Profitability TCL Industry Gross Margin - 5 Yr Avg. 27.06% 20.29% Net Profit Margin (5 Yr Avg.) 4.76% 4.00% Financial Strength TCL Industry Industry: Printing and Publishing, source: Reuters Net Debt / (Net Debt + Equity) 39% N/A Net Debt to Equity 60.00% N/A LT Debt to Equity 54.41% 13.11% Management Effectiveness TCL Industry Return on Assets - 5 Yr Avg. 4.83% 3.76% Return on Equity - 5 Yr Avg. 9.92% 6.02% Growth TCL Industry Sales - 5Yr Growth rate 5.05% 5.25% EPS - 5 Yr Growth rate 0.05% 11.48% Dividend Growth - 5Yr 18.00% 12.00% Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 16
  • 17. Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A
  • 18. DCF Valuation Assumptions 5yr projection based on estimated growth rates WACC of 11% until normal in 2013 Normal Stage WACC 10% Terminal growth rate estimated at 2.75% Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 18
  • 19. WACC Calculation Growth Stage Normal Stage β 1.41 β 1.32 Rd 10.75% Rd 7.00 % Re(CAPM) 12.74% Re (CAPM) 12.23% Debt portion (D/V) 0.37 Debt portion (D/V) 0.30 WACC 11% Terminal WACC 10% Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 19
  • 20. Forecasts C$2,600 C$500 C$2,550 C$400 EBITDA and Cash Flow C$2,500 C$300 C$2,450 Sales C$2,400 C$200 C$2,350 C$100 C$2,300 C$0 C$2,250 -C$100 C$2,200 C$2,150 -C$200 2006 2007 2008 2009e 2010e 2011e 2012e 2013e Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 20
  • 21. Comparables Weighted Various competitors in EV/EBITDA average based 3 SBUs on SBUs Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 21
  • 22. Comparables (2) Publishing Marketing 5.85x 5.69x Printing 4.07x Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 22
  • 23. Share Value Discounted Comparables Cash Flow Opportunity Company Overview Fundamentals 13.50 Valuation Risks and Scenarios Q&A 23
  • 24. Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A
  • 25. Risks and Concerns Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 25
  • 26. Risks and Concerns (2) C$20.00 Terminal Growth ± 1% C$18.00 Terminal WACC ± 1% C$16.00 EBIT ± 2% C$14.00 CAPEX ± 5% C$12.00 WACC ± 1% C$10.00 FX ± 0.15 C$8.00 Range: CAD9.80 - CAD18.80 Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 26
  • 27. Investment Opportunity Strong Attractive Balance Sheet Valuation Buy Balanced Industry Portfolio Leader Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 27
  • 28. Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A
  • 29. Questions and Answers Strategic Business Units Comparable Companies Balance Sheet Institutional Holders EV/EBITDA Cash Flow Statement Investment Opportunity Fundamentals Income Statement Management Growth Rates Recent Acquisitions Growth Rates Graphs Revenues by sector Levered/Unlevered Beta Revenue by sector/region Scenario Analysis Risk and Concerns Updates SWOT Analysis WACC Calculations Opportunity Company Overview Fundamentals Valuation Risks and Scenarios Q&A 29
  • 30. Scenario Analysis RECESSION CONTINUES IN RECESSION CONTINUES IN 2009, ENDS IN Q1 2010 2009 & WORSENS IN 2010 • Sales 20% below • Sales 40% below expectations expectations for 2010 • EBIT margin down to 5.6% • EBIT margin down to 2.2% in • Interest expense up 30% 2010 • Interest expense up 50% 30
  • 31. Comparable Companies Publicis Groupe SA CBC Corp Viacom Inc Time Warner Corp. Comcast Corporation CanWest Global Media Glacier Ventures Torstar Corporation John Wiley & Sons Inc McGraw-Hill Co. Media General Acxiom Harte Hanks Mktg Dunn and Bradstreet Cenveo Consolidated Graphics Printing RR Donnelley & Sons Bowne & CO Deluxe Corporation CanWest Global 31
  • 32. Growth Rates 2007 % of sector 2009 2010 2011 2012 2012 2013 Media Sector Consumer and business magazine group $ 212 33.7% 2.0% 3.0% 3.6% 4.0% $ 250 4.0% Newspaper Group $ 241 38.3% 0.0% 0.4% 3.2% 3.2% $ 266 3.2% Distribution Group $ 120 19.1% 1.0% 1.0% 2.0% 2.5% $ 131 2.5% Educational Publishing Group $ 56 8.9% 2.0% 3.0% 3.2% 3.5% $ 65 3.5% Total $ 629 26.0% 1.0% 1.6% 3.1% 3.4% $ 712 3.4% Print Sector Newspaper Group $ 243 15.8% -6.0% -6.0% -6.0% -6.0% $ 178 -6.0% Book, Catalogues and Magazine Group $ 483 31.3% 0.0% 1.0% 2.0% 2.0% $ 518 2.0% Mexico Group $ 85 5.5% 15.0% 15.0% 15.0% 15.0% $ 171 15.0% Direct Mail Group $ 280 18.2% -36.0% -30.0% 5.0% 5.0% $ 145.21 5.0% Retail Group $ 451 29.2% -3.0% 1.0% 2.0% 3.0% $ 478 3.0% Total $ 1,542 63.8% -7.5% -3.1% 2.1% 2.6% $ 1,490 2.9% Marketing Communications Interactive Marketing Group $ - 0.0% 0.0% 2.0% 2.0% 2.5% $ 11 2.5% Direct Marketing Products -- Ontario $ 58 23.5% -5.0% -1.3% 1.0% 2.0% $ 57 2.0% Direct Marketing Products -- Quebec $ 157 63.6% -5.0% -1.2% 1.0% 2.0% $ 155 2.0% Other $ 32 13.0% -13.0% 0.0% 0.0% 0.0% $ 28 0.0% Total $ 247 10.2% -2.0% -1.0% 0.9% 1.8% $ 251 1.8% Total Total $ 2,418 -4.7% -1.5% 2.3% 2.8% $ 2,453 2.9% 32
  • 33. Growth Rates (2) 4.00% 1.00% Growth Rate -2.00% -5.00% -8.00% 2009e 2010e 2011e 2012e 2013e Media 1.04% 3.00% 3.60% 4.00% 4.00% Printing -7.53% -3.06% 2.09% 2.65% 2.89% Marketing -1.99% -0.95% 0.93% 1.79% 1.80% 33
  • 34. Sensitivity EBIT 2% Terminal WACC 1% Share Price Share Price -2.0% $ 13.18 -1.0% $ 16.45 -1.0% $ 13.43 -0.5% $ 14.96 0.0% $ 13.67 0.0% $ 13.67 1.0% $ 13.92 0.5% $ 12.56 2.0% $ 14.17 1.0% $ 11.57 Tax Rate 2% WACC 1% Share Price Share Price -2.0% $ 14.38 -1.0% $ 14.64 -1.0% $ 14.02 -0.5% $ 14.15 0.0% $ 13.67 0.0% $ 13.67 1.0% $ 13.32 0.5% $ 13.21 2.0% $ 12.97 1.0% $ 12.75 CAPEX Spending 2% Terminal Growth Rate 1% Share Price Share Price -2.0% $ 13.85 -1.0% $ 9.83 -1.0% $ 13.76 -0.5% $ 11.63 0.0% $ 13.67 0.0% $ 13.67 1.0% $ 13.59 0.5% $ 16.04 2.0% $ 13.50 1.0% $ 18.79 34
  • 35. SWOT Analysis Strengths Weaknesses •Top player in industry • Weakness in the market •Long term contracts • Industry negative growth •Consistent growth in next 5 years Opportunities Threats •Growth in Marketing and Media • Declining growth in printing segments segment •Expanding in US and Mexico Market •Increase competition from online media and marketing 35
  • 36. Revenues by sector Transcontinental Revenues by groups Digital Media Education Publishing Group, 0.5% Group, 2.3% Newspaper Group, 8.9% Distribution Group, 5.0% Newspaper Group, 10.0% Book Group, 6.2% Mexico Group, 3.5% Magazine Commercial Products Group, 8.4% Group, 11.1% Direct Marketing Group, 11.6% Retail Group, 18.7% Premedia Group, 1.2% Catalogue and Magazine Group, 12.7% 36
  • 37. Forecast CA$1,400 CA$1,200 CA$1,000 CA$800 CA$600 CA$400 CA$200 CA$0 2009 2010 2011 2012 2013 37
  • 38. Management Rémi Marcoux, C.M, O.Q, F.C.A, Executive Chairman of the Board • Executive Chairman at Transcontinental since 2004 after being CEO • Founded the Company in 1976 • Officer of the National Order of Québec Francois Olivier, President and CEO • CEO as of February 20th, 2008 • Focused on innovation, teamwork and customer satisfaction • B.Sc from McGill University, Harvard program for management development Benoit Huard, CFO • CFO since 2006, Corporate treasurer since 2002 • Chartered Financial Accountant • Senior positions in large public companies such as Quebecor 38
  • 39. Revenue by sector/region 39
  • 40. Levered/Unlevered Beta Sector Company β D/E βu Tax rate Sector βu Printing RRD 1.65 1.10 0.94 0.32 Consolidating Graphics 2.00 1.24 1.16 0.41 Bowne & Co 2.19 0.50 1.68 0.40 1.26 Media Media General 2.07 2.13 0.86 0.34 Time Warner Inc. 1.37 0.63 0.98 0.38 McGraw-Hill Co. 1.13 0.92 0.73 0.40 0.86 Marketing Acxiom 1.60 1.15 0.93 0.37 Harte Hanks 1.23 0.75 0.83 0.37 0.88 Unlevered TCL 0.99 Tax Rate 0.30 D/E 0.60 Leveraged TCL 1.41 40
  • 41. Recent Acquisitions Provider of multi-channel marketing services Custom marketing communications A Database marketing company Web-based platform for buying and selling businesses Provider of e-mail marketing solutions 41
  • 42. Institutional Holders Institution Shares % Held Mackenzie Financial Corporation 10,127,289 15.66% Franklin Templeton Investments Corp. 8,613,823 13.32% Jarislowsky Fraser, Ltd. 8,230,272 12.73% Bissett Investment Management Ltd. 5,462,975 8.45% Caisse de Dépôt et Placement du Québec 3,054,334 4.72% QV Investors Inc. 2,318,550 3.59% Invesco Trimark Ltd. 2,154,200 3.33% MFC Global Investment Management 2,003,512 3.10% Howson Tattersall Investment Counsel Ltd. 1,848,648 2.86% CPP Investment Board 1,713,000 2.65% Source: Reuters 42
  • 43. EV/EBITDA EV/EBITDA 2009E 2010E 2009E P/E 2010E Transcontinental 4.10x 3.93x 8.65x 8.76x EV/EBITDA P/E 2009E 2010E 2009E 2010E Publicis Groupe SA 4.91x 4.88x 9.08x 8.76x CBC Corp 5.12x 4.43x 7.57x 6.67x Viacom Inc. 6.08x 5.34x 10.77x 9.18x Time Warner Inc. 5.60x 5.32x 9.57x 9.09x Comcast Corporation 5.65x 5.37x 16.18x 13.75x Media CanWest Global Comm. 6.02x 5.77x 6.92x 6.92x Glacier Ventures 5.60x 6.10x 5.02x 5.70x Torstar Corporation 6.45x 6.16x 7.82x 7.06x John Wiley & Sons Inc. 8.03x 6.69x 11.73x 9.75x McGraw-Hill Co. 4.69x 4.09x 9.04x 7.92x Media General 6.23x 8.58x 7.84x 7.50x Average 5.85x 5.70x 9.23x 8.39x Acxiom 4.52x 4.69x 11.19x 13.13x Mktg Dun and Bradstreet Corp 7.67x 7.09x 12.93x 11.40x Harte Hanks 4.87x 4.63x 8.86x 7.98x Average 5.69x 5.47x 10.99x 10.84x Cenveo 5.63x 5.82x 4.05x 3.47x Consolidated Graphics 4.21x 4.16x 7.49x 7.82x Printing R.R.Donnelley & Sons 4.00x 3.75x 5.19x 4.54x Bowne & Co. 1.60x 2.19x 12.02x 4.70x Deluxe Corp 4.91x 5.36x 6.13x 5.33x Average 4.07x 4.26x 6.98x 5.17x Blended Average SUM Weight EV/EBITDA EBITDA from Media (2008) $ 117.60 30.6% 1.79x EBITDA from Marketing (2008) $ 149.80 38.9% 2.21x EBITDA from Printing (2008) $ 117.40 30.5% 1.24x 43 Total EBITDA (2008) $ 384.80 100.0% 5.24x
  • 44. EV/EBITDA Multiples EV/EBITDA P/E 2009E 2010E 2009E 2010E Transcontinental 4.10x 3.93x 8.65x 8.76x EV/EBITDA P/E 2009E 2010E 2009E 2010E Time Warner Inc. 5.60x 5.32x 9.57x 9.09x Publishing McGraw-Hill Co. 4.69x 4.09x 9.04x 7.92x Media General 6.23x 8.58x 7.84x 7.50x Average 5.51x 6.00x 8.82x 8.17x Acxiom 4.52x 4.69x 11.19x 13.13x Mktg Harte Hanks 4.87x 4.63x 8.86x 7.98x Average 4.70x 4.66x 10.03x 10.56x Consolidated Graphics 4.21x 4.16x 7.49x 7.82x Printing R.R.Donnelley & Sons 4.00x 3.75x 5.19x 4.54x Bowne & Co. 1.60x 2.19x 12.02x 4.70x Average 3.27x 3.37x 8.23x 5.69x Blended Average SUM Weight EV/EBITDA EBITDA from Media (2008) $ 117.60 30.6% 1.68x EBITDA from Marketing (2008) $ 149.80 38.9% 1.83x EBITDA from Printing (2008) $ 117.40 30.5% 1.00x Total EBITDA (2008) $ 384.80 100.0% 4.51x 44
  • 45. Income Statement Income Statement (US$) 2008A 2009e 2010e 2011e 2012e 2013e Total Sales $ 2,282 $ 2,364 $ 2,354 $ 2,402 $ 2,467 $ 2,535 Total COGS $ 1,781 $ 1,726 $ 1,716 $ 1,748 $ 1,793 $ 1,843 Gross Profit $ 648 $ 638 $ 638 $ 653 $ 673 $ 692 Total Expenses $ 284 $ 276 $ 275 $ 280 $ 288 $ 296 EBITDA $ 365 $ 362 $ 363 $ 373 $ 385 $ 396 EBIT $ 16 $ 234 $ 203 $ 223 $ 235 $ 246 Net Income $ 153 $ 129 $ 107 $ 122 $ 135 $ 149 Basic EPS $1.87 $1.57 $1.32 $1.49 $1.65 $1.83 45
  • 46. Balance Sheet Balance Sheet (US$): 2008A 2009e 2010e 2011e 2012e 2013e Total Current Assets $ 446 $ 348 $ 399 $ 496 $ 357 $ 366 Total Assets $ 2,620 $ 2,706 $ 2,776 $ 2,873 $ 2,734 $ 2,743 Total Current Liabilities $ 745 $ 533 $ 531 $ 539 $ 788 $ 674 Long-Term Debt $ 602 $ 796 $ 789 $ 782 $ 286 $ 286 Total Current & L.T. Debt $ 1,514 $ 1,496 $ 1,486 $ 1,487 $ 1,240 $ 1,125 46
  • 47. Cash Flow Statement Cash Flow Statement (US$): 2008A 2009e 2010e 2011e 2012e 2013e Net Income $8 $ 129 $ 107 $ 122 $ 135 $ 149 Cash Flow from Operations $ 300 $ 257 $ 267 $ 271 $ 285 $ 299 Investment Activities: $ (328) $ (311) $ (180) $ (150) $ (150) $ (150) Financing Activities: $ 79 $ (26) $ (34) $ (33) $ (522) $ (26) 47
  • 48. Dividend Discount Model BASE CASE YEAR 2008 2009 2010 2011 2012 2013 PERPETUITY 20.073 DIVIDEND $ 0.31 0.31 0.31 0.32395 0.33691 0.3712 PV OF PERP = 12.424 DISCOUNT RATE 1 1.1275 1.27114 1.43309 1.6157 STOCK PRICE = 13.7285 RECESSION 2009 PICKS UP 2010 YEAR 2008 2009 2010 2011 2012 2013 PERPETUITY 18.002 DIVIDEND $ 0.31 0.248 0.2728 0.29053 0.30215 0.3329 PV OF PERP = 11.142 DISCOUNT RATE 1 1.1275 1.27114 1.43309 1.6157 STOCK PRICE = 12.2777 RECESSION 2009 WORSENS 2010 YEAR 2008 2009 2010 2011 2012 2013 PERPETUITY 12.97 DIVIDEND $ 0.31 0.248 0.1984 0.20931 0.21768 0.2399 PV OF PERP = 7.9211 DISCOUNT RATE 1 1.14 1.2882 1.45232 1.6373 STOCK PRICE = 8.80198 48
  • 49. Thank You 49