Magna International Inc.

Magna International Inc. (TSX: MG) operates as a mobility technology company and has 342 manufacturing operations and 91 product development, engineering, and sales centers, with operations across more than 27 countries.

Key Updates

• Lower Profitability Margins: In Q3FY21, the company posted lower margins than the industry median, indicating weak operational efficiencies and remaining a significant concern. Gross margin and EBITDA margin in Q3FY21 stood at 13.1% and 7.3%, respectively, compared to the industry median of 23.1% and 11.3%. Notably, operating margin and net margin were considerably lower at 0.3% and 0.2%, respectively, during the period, as compared to the industry median of 6.0% and 2.8%.

• Weak Liquidity: In Q3FY21, the company reported its current ratio and a quick ratio of 1.41x and 0.97x, respectively, compared to the industry median of 1.78x and 0.99x, respectively. The above indicates that the company is struggling to meet its short-term obligations with its current assets.

• Decline in the Revised Guidance: For FY21, the company expects its total sales to range between USD 35.4 to 36.4 billion, lower than its previous guidance of USD 38.0 to 39.5 billion. The above decline was primarily due to a weak outlook from its Body Exteriors & Structures and Seating Systems. Moreover, the adjusted EBITDA margin is expected to range from 5.1% to 5.4%, compared to its previous guidance of 7.o% to 7.4%, suggesting a possible hike in input costs.

Source: Company Report

Valuation Methodology (Illustrative): Price to Cash Flow based

Stock Recommendation

The company’s performance is directly correlated to global light vehicle production. The outlook remains soft across major economies like North America, Europe, and China, which might impact the company’s upcoming performance, due to lower than expected order book. Notably, sales and adjusted EBIT stood at USD 7,919 million and USD 229 million, respectively, in Q3FY21, which is lower than USD 9,129 million and USD 778 million in pcp. Therefore, we have valued the stock using the Price to CF-based relative valuation approach and arrived at a target price, suggesting a double-digit downside potential (in % terms). For the said purpose, we have considered peers like Martinrea International Inc, Tenneco Inc etc. Hence, considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock at the closing price of USD 106.11 on November 23, 2021.

One-Year Technical Price Chart (as on November 23, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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