Westport Fuel Systems Inc (TSX: WPRT) develops high-performance, low-emission gaseous fuel engine and fuel system technology. Original Equipment Manufacturer (OEM), Independent Aftermarket (IAM), and Corporate are the three business sectors of the corporation. Geographically, it generates the most income in Europe, but it also has operations in the Americas, Asia, and other regions.

Investment Highlights

• Sequentially improving financials: Despite the uncertainty, the Company maintained its momentum and made decent revenue, EBITDA, and net income performance. Due to the sustained recovery of sales volumes in its OEM and IAM businesses, as well as the addition of USD 13.8 million in revenue from the newly acquired fuel storage company, revenue increased by USD 59.9 million, or 24%, to USD 312.4 million in FY 2021. On the bottom line, it turned a net loss into a net profit, which is a big plus. The Company is working hard to keep its winning streak going and has witnessed a respectable gain in scale on a sequential basis.

Source: Company Filing, Analysis by Kalkine Group

• Gaining traction from HPDI technology: In the Heavy-duty OEM category, the company's HPDI technology is still in the early stages of commercialization. Despite the economic effect of COVID-19 and the associated global supply chain problems, sales volumes with its first launch partner have increased year over year. From its supply deal with Weichai Westport Inc., the business expects substantial increase in sales volumes in China, the largest market for natural gas-powered commercial vehicles, as well as new OEMs coming into supply agreements for the HPDI 2.0 fuel systems technology.
  

• Expanding production: Last year, the company agreed to invest with its Tier 1 global injector manufacturing partner to expand production at its plant in China, in anticipation of rising demand for fuel injectors in the emerging worldwide market for HPDI 2.0 fuel systems. Because of the advancement in technology, Weichai Westport Inc. (WWI) increased the minimum purchase of HPDI 2.0 fuel system components necessary to construct a minimum of 25,000 engines by the end of 2024, up from 18,000 engines.

• Strong liquidity profile: The company's liquidity ratios are improving sequentially, which is a significant positive. In FY2021, the company's current ratio was 2.31x vs the industry median of 2.06x, and its quick ratio was 1.74x versus the industry median of 1.28x. These increased ratios in comparison to the industry suggest that the company's short-term liabilities are expanding at a slower rate than its resources to fulfill them, which is a positive sign.

Source: REFINITIV, Analysis by Kalkine Group

• Strong balance sheet: The company's cash and cash equivalents, including restricted cash in FY 2021, grew by USD 60.6 million to USD 124.9 million, up from USD 64.3 million in pcp. The rise was directly linked to the year's marketing public offering of common shares and at-the-market ("ATM") offering. Furthermore, the firm is continuously lowering its debts, and at the end of FY 2021, its debt to equity stood at 0.34x vs 0.97x in pcp, lower than the industry median of 0.42x, which is a huge benefit.

• Divesting stake in CWI Joint Venture: CWI was the leading supplier of natural gas engines to the medium and heavy-duty truck and transit bus sectors in North America. Westport Fuel Systems and Cummins agreed to a share purchase agreement on February 7, 2022, for the sale of Westport Fuel Systems' investment in CWI, with Cummins continuing to manage the business as the sole owner. Following the closing date, the business received USD 31.4 million in proceeds, net of a USD 10.8 million holdback.

• Russia-Ukraine Conflict: In Russia, the firm performs a significant proportion of its LD OEM and IAM business by supplying products to several OEMs and other IAM clients. Because of Russia's invasion of Ukraine in late February 2022, the United States, European Union, Canada, and other Western nations and organizations have declared and enforced a slew of sanctions against the country. The sanctions' potential implications might have an impact on its operations in Russia.

Risks Associated with Investment: The company is exposed to many risks which could affects its financials and cash flows. At the present stage the automotive industry and Westport Fuel Systems are currently experiencing global supply chain challenges to source semiconductors and other inputs to production due to supply shortages. The global scarcity of semiconductors and raw materials is affecting vehicle production and causing bottlenecks. Other significant concerns are gasoline costs, foreign currency rates, raw material prices, and so on.

Financial overview of FY2021 (In 000 of USD)

Source: Company Filing

• Elevated revenues: In FY 2021, the company posted higher revenue at USD 312.4 million against USD 252.4 million in pcp. This increase in revenue was primarily due to the continued recovery of sales volumes in its OEM and IAM businesses and the addition of USD 13.8 million in revenue from the recently acquired fuel storage business.
• Higher cost of sales: On the back of rise in revenue in FY 2021, the company’s cost of sales increased to USD 264.2 million against USD 212.9 million in pcp.
• Rise in total operating expenses: The company’s total operating expenses in the reported period stood at USD 342.9 million compared to USD 274.4 million in pcp.
• Loss from operations: The company’s operating loss increased to USD 30.5 million against USD 21.9 million in pcp.
• Transformed net losses in to profit: The company posted net profit of USD 13.6 million against a loss of USD 7.3 million in pcp, this transformation was mainly due to income from investments accounted for by the equity method and partially supported by income tax recovery.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 32.89% of the total shareholding. Douglas (Kevin Glen) and Deka Vermögensmanagement GmbH hold the company's maximum interests at 11.72% and 3.21%, respectively. The company's institutional ownership stood at 32.88%. Higher institutional holding boosts the confidence in the mind of retail investors.

Valuation Methodology (Illustrative): EV/ Sales Based Valuation multiple

*1USD = 1.25CAD

Analysis by Kalkine Group

Stock Recommendation

Despite the consequences of persisting COVID limitations, supply chain constraints, and other challenges that the worldwide sector is now suffering, the firm produced record annual sales in FY2021. The acquisition of Stako significantly boosted the company's 2021 performance and, more crucially, increased its product line and production capabilities.

A crucial positive is that the balance sheet and organizational changes accomplished throughout the year position the company well to meet its mid- and long-term goals. Furthermore, the firm may encounter margin issues because it sells its products to various OEMs and other IAM customers in Russia, and the sanctions may have an impact on its business in Russia. Hence considering the aforementioned risks and rationales we recommend a ‘Speculative Buy’ rating on the stock of WPRT at the current market price of CAD 2.10 at 9:46 A.M Toronto time on March 30, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 30, 2022). Source: Kalkine, Analysis by Kalkine Group

Technical Analysis Summary

Disclaimer

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