All trends are Stable.
KEY CREDIT RATING CONSIDERATIONS
The confirmation reflects the Company's resilient operating results in F2023 and Q1 F2024, in the midst of a challenging operating environment. While Transcontinental's sales declined to the low single digits for the last 12 months ended
CREDIT RATING DRIVERS
A positive credit rating action could occur should the Company continue to grow the Packaging segment, such that consolidated operating income grows on a consistent basis, coupled with gross leverage moving below 2.0 times (x) in a sustainable manner. Conversely, a deterioration in operating performance, for example, one that contributes to a sustained erosion of market share and/or more aggressive financial management than anticipated, such that Morningstar DBRS-adjusted leverage increases above 3.0x for an extended period, could result in a negative credit rating action. Morningstar DBRS also notes that Transcontinental has a history of using its balance sheet to fund accretive acquisitions that are followed by periods of concentrated deleveraging.
EARNINGS OUTLOOK
Morningstar DBRS anticipates Transcontinental's earnings will be relatively stable year-over-year in F2024, as a decline in top-line is expected to be offset by improving profitability. Revenue is expected to decline in the low single digits in F2024 toward
FINANCIAL OUTLOOK
In terms of Transcontinental's financial profile, Morningstar DBRS expects key credit metrics to strengthen to a level considered strong for the current BBB (low) rating category in the near term, as the Company continues to prioritize deleveraging in F2024. Free cash flow (FCF) after dividends and before changes in working capital is forecast to improve into the
CREDIT RATING RATIONALE
Transcontinental's credit ratings remain supported by the Company's strong market position in the print industry, attractive long-term outlook in the Packaging segment, diversified customer base and product offerings, and strong FCF-generating capacity. The credit ratings also continue to consider the structural shift to digital media from print, as well as the risks associated with growth through acquisition.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
There were no Environmental factor(s) that had a relevant or significant effect on the credit analysis.
Social (S) Factors
There were no Social factor(s) that had a relevant or significant effect on the credit analysis.
Governance (G) Factors
There were no Governance factor(s) that had a relevant or significant effect on the credit analysis.
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (
BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
A) Weighting of BRA Factors
In the analysis of
B) Weighting of FRA Factors
In the analysis of
C) Weighting of the BRA and the FRA
In the analysis of
Notes:
All figures are in Canadian Dollars unless otherwise noted.
Morningstar DBRS applied the following principal methodologies:
Global Methodology for Rating Companies in the Services Industry (
https://dbrs.morningstar.com/research/431185/global-methodology-for-rating-companies-in-the-services-industry
Global Methodology for Rating Companies in the Industrial Products Industry (
https://dbrs.morningstar.com/research/431173/global-methodology-for-rating-companies-in-the-industrial-products-industry
Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (
The following methodology has also been applied:
Morningstar DBRS Global Corporate Criteria (
https://dbrs.morningstar.com/research/431186/morningstar-dbrs-global-corporate-criteria
Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (
The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.
A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.
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@morningstar.com.
The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.
Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
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