Shawcor Ltd. (TSX:SCL) is a Canada-based global energy services company. Shawcor Ltd. is serving Infrastructure, Energy, and Transportation markets. The Company operates through a network of fixed and mobile manufacturing and service facilities. Its three business segments, Composite Systems, Automotive & Industrial and Pipeline & Pipe Services enable responsible renewal and enhancement of critical infrastructure while lowering risk and environmental impact

Investment Rationale

• Expanded growth strategy in Automotive and Industrial segment: Demand for the company’s products moving well in the Automotive and Industrial segment. To meet this demand and provide new technology solutions to their customers, the company recently announced its plan to expand and modernize its manufacturing capabilities in the Greater Toronto Area. The new facility will enable them to increase product portfolio and capacity, both organically and through acquisitions.
• Macro tailwind: Macro drivers for Shawcor continue to evolve positively, with increasing global investment in critical infrastructure, accelerating demand for premium and electric vehicles and strengthening commodity price fundamentals. Cumulatively these underpin confidence that a multi-year upcycle for Shawcor business is developing.
• Deleveraging Balance Sheet: Balance sheet risk is cooling off for the existing as well as potential investors, as company has consistently deleveraged its balance sheet over the past one year. As of September 30, 2021, Debt/Equity ratio for the company stood at 0.55x vs 0.76x reported as of September 30, 2020.

Source: REFINITIV, Analysis by Kalkine Group

• ShawFlex business reached a new record backlog: During the third quarter of 2021, ShawFlex business reached a new record backlog mainly on the back of a broad array of critical infrastructure renewal and expansion projects. The company continue to have a constructive view of the mid and long-term market trends which impact this business.
• Composite System and Automotive segment performed well in Q3FY21: In Q3FY21, Composite system segment revenue rose by CAD 6.4 million or 7% when compared to the second quarter of 2021. Moving to company’s Automotive and industrial segment. In Q3FY21 this segment saw revenue rise CAD 4.7 million or 7% compared to the second quarter, reaching a new record high in both revenue and adjusted EBITDA.

Risk Associated

The company’s operation are exposed to variety of risks ranging from increase in input costs on the back of inflationary pressure, legal and litigation risks, supply chain risks on the back of resurgence in COVID-19 cases, forex risks as majority of revenue comes from U.S market, demand risk, interest rate risks and liquidity risk as well.

Financial Highlights: Q3FY21

Source: Company filing

• Reported revenue growth on YoY basis: Consolidated revenue in the Q3FY21 improved by CAD 23.7 million, or 9% to CAD291.4 million, from CAD 267.7 million reported in Q3FY20 despite the absence of revenue attributable to the Products business.
• Segment performance: The increase in consolidated revenue was primarily driven by a CAD 19.2 million increase in the Composite Systems segment and a CAD 22.1 million increase in the Automotive and Industrial segment, partially offset by a CAD 17.9 million decrease in the Pipeline and Pipe Services segment.
• Solid Operating income growth on YoY basis: In Q3FY21 operating income was CAD 2.5 million compared to the CAD 19.3 million operating loss incurred in the same quarter of the previous financial year. This improvement is primarily driven by a CAD 9.6 million increase in gross profit coupled with decreases in restructuring and other costs.
• Narrowed net losses: During the quarter under consideration, the company’s reported net losses significantly narrowed to CAD 8.4 million compared to CAD 18.4 million reported in the same quarter of the previous financial year.

Top-10 Shareholders:

Top-10 shareholders together holds 45.98% stake in the company, with Turtle Creek Asset Management Inc. and Burgundy Asset Management Ltd. are the major shareholders in the company with outstanding position of 17.84% and 9.53% respectively. The institutional ownership in the company stood at 48.97%.

Source: REFINITIV

Valuation Methodology (Illustrative): Price to Sales-Based Valuation

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation

During the third quarter, the company continued to deliver on its commitment to support critical infrastructure markets with highly engineered materials-based solutions. Also, generating revenue increases in Composite System and Automotive segment  business segments compared with the same period last year. Also increased backlog on a quarter-over-quarter basis with new business capture exceeding backlog consumption in all reporting segments. This improvement in backlog and the even more favorable change in budgetary coat balance reflect an increasingly positive macro environment. Going forward despite near-term seasonal schedule and supply chain driven hurdles, Shawcor’s superior product portfolio is very well positioned to benefit from increasingly favorable market trends across the critical infrastructure sector.

Therefore, based on the above rationale, risk associated, and valuation done, we recommend a “Speculative Buy” rating on SCL stock at the closing price of CAD 4.87 (December 07, 2021).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary:

1-Year price chart (as on December 07, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on December 08, 2021, price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.