Stephen Mitchell & Bryan Pilsworth Long Transcontinental & Walgreens Boots Alliance: London Value Investor Conference 2018 ~ market folly

Tuesday, May 29, 2018

Stephen Mitchell & Bryan Pilsworth Long Transcontinental & Walgreens Boots Alliance: London Value Investor Conference 2018

We're posting up notes from the 2018 London Value Investor Conference.  Next up is Stephen Mitchell and Bryan Pilsworth of Foyston, Gordon & Payne who pitched two longs: Transcontinental (TSE:TCL) and Walgreens Boots Alliance (NASDAQ:WBA).

Stephen Mitchell & Bryan Pilsworth's London Value Investor Conference Presentation

Long Transcontinental (TSE:TCL):  It's Canada’s largest printing company and an emerging N.A packager. It’s a high-quality company that is not broken but it is going through a change process.  The company is well lead by Francois Olivier (President & CEO) and Isabelle Marcoux (Chair). They have been astute at getting out of declining businesses quickly, for example, they exited the textbook market. The remainder of the printing business achieves high margins.

TCL is better and cheaper than peers. For example, it is more profitable than its competitor, Quad.  Unlike printing, packaging is a growth market. The US market is worth $25bn and is growing 2-3%per year. Transcontinental’s printing know-how is transferable to packaging. TCL entered the packaging market in 2014 and by 2017 it had acquired 7 plants. In 2018 it acquired a further 21 new plants with a US focus from Coveris America.  TCL are now No. 7 in packaging in the US. They are No. 2 in cheese packaging.P/E 11.5x (2019); EPS $2.4; EV/EBITDA 7x (2019)

Long: Walgreen Boots Alliance (NASDAQ: WBA):  The shares are cheap because it’s rumoured that Amazon is going to enter the pharmacy business.  70% of prescriptions are recurring. 85% of prescriptions are generic.  People with recurring prescriptions may chose Amazon home delivery. Pharmacies may lose foot traffic which will impact brick and mortar store sales.

Walgreens is the largest retail pharmacy, health and daily living destination across the US and Europe. Market Cap $63bn. Global sales of $118bn, over 13,200 stores in 11 countries. Over the last 10 years, sales and EPS growth of 8%. Average ROE of 16%.  Two reasons why pharmacy/ store networks have a moat against Amazon.  1. Convenience: 70% of seniors chose pharmacy over mail order due to convenience.  2. Compliance: Managed Care Operators (MCOs) need pharmacies to ensure proper patient drug usage.  So far chains have taken share at the expense of mail order and independents.

High margin beauty products provide an opportunity to improve front-of-store sales and expand margins. Customers like in-store demonstrations before purchase. On-line sales are only 8% but growing.  Walgreens already has an omni-channel offering - a multi-channel sales approach – and a mobile offering. The mobile channel has 88m users in the US. Half of digital sales come through mobile. 50% of users use an app in-store. 20% of users are 55 years or older.  PE 10.3x CY 2018; ROE 19.8% CY 2018; Net debt / EBITDA 1.5x; dividend yield 2.5%.

Be sure to check out the rest of the presentations from the London Value Investor Conference 2018.

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