Linamar Corp

Linamar Corp (TSX: LNR) is a Canada-based manufacturing company that makes powertrains and drivelines for vehicle and power generation markets and operates under two business segments: Transportation and Industrial.

Key Highlights

Electrified Vehicles Key Growth Opportunity: With emission regulations, zero-emission vehicle mandates, and low-emission zones in place in many jurisdictions around the world, demand for Fuel Cell Electric Vehicles (FCEVs) that can operate on long duty cycles – without sacrificing payload – and can be quickly refueled to maximize fleet utilization is increasing. On the basis of its varied propulsion types, diverse products, and scalable solutions, the company is also attempting to optimize its electrification prospects. The company intends to grow its electric vehicle content per vehicle in the future years, which is a major plus.

Source: Company

• Reducing debts: The company is continuously reducing its debt, which is a key positive considering the current sluggish economic conditions. To retain the liquidity levels, most companies have increased their borrowings, however, LNR has reduced its borrowings, which is an indication of prudent capital management. Notably, the net debt to EBITDA remained lowest in the last four quarters, which is impressive and indicates lower finance costs.

Source: Company

• Healthy New business wins: The company hold a healthy profile of its new business win, which grew strong and built its launch book to over CAD 3.7 billion, with nearly 25% of year-to-date new business wins was for electrified vehicles, where the company expects higher CPV, which is a key positive.
• Robust liquidity: The Company’s financial condition remains solid, given its strong balance sheet and has maintained sufficient liquidity to satisfy its financial obligations. On June 30, 2021, Cash and cash equivalents, including short-term deposits, was CAD731.6 million, and the Company’s credit facilities had available credit of CAD957.6million. Combined, the Company believes this liquidity of CAD1.7 billion is sufficient to meet cash flow needs.

Financial overview of Q2 2021 (In thousands of CAD)

Source: Company

• During the second quarter of 2021, the Company experienced strong sales growth and increased 71% to CAD 1,575.2 million, compared to CAD 923.5 million in the previous corresponding period.
• The company reported much improved gross profit at CAD 228.5 million against CAD 40 .9 million in pcp, primarily due to lower cost of sales and higher revenue.
• In Q2 2021, the gross margin increased to 14.5% compared to 4.4% in Q2 2020, while the Cost of sales before amortization as a percentage of sales decreased to 78.6% compared to 83.7%.
• The company reported operating profit of CAD 153.6 million compared to a loss of CAD 25.2 million in pcp.
• Primarily on the back of above discussed rationales the company’s net income stood at CAD 107.9 million compared to a loss of CAD 37.9 million in pcp.
  

Risks associated with investments

The significant risks which could directly impact the company’s cash flows and financial health are like major increases in shipping costs, Semi-Conductor chip shortages and spiking commodity prices. Other risks are also there such as fall in demand from automobile manufacturers, disruptions from the supply chain, technological change, etc.

Valuation Methodology (Illustrative): EV to EBITDA 

Stock recommendation

The group reported encouraging performance in the recent quarter, where it posted 71% growth in its sales and posted a free cash flow of CAD 137.7 million. The strong market demand is helping to drive an excellent recovery, although the pressures from supply chain shortages are creating challenges but the group is managing them and at the same time growing market share and generating cash, which is appreciable. Furthermore, the company hold a strong balance sheet and is looking on electrified vehicles as a key growth opportunity, we believe this would enhance the company’s free cash flows. Therefore, based on the above rationales and valuation, we recommend a "Buy" rating at the closing price of CAD 71.64 as on August 30, 2021. We have considered Magna International Inc, Martinrea International Inc, Dana Inc, etc. as the comparison's peer group.

*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

One-Year Technical Price Chart (as on August 30, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Alamos Gold Inc

Alamos Gold Inc. (TSX: AGI) is a Canada based gold producer which operates in Canada and Mexico. The company has three operating mines, the Young-Davidson Mine in Canada and the Mulatos and El Chanate Mines in Sonora, Mexico.

Key highlights

• Healthy cash flow from operating activities: In Q2 2021, the company generated cash flow from the operation, before changes in working capital at USD 97.2 million increased phenomenally by 116%, against USD 44.7 million in the previous corresponding period, while total mine-site free cash flow stood at USD 20.1 million, against USD 5.4 million in the previous corresponding period.

Source: Company

• Preliminary production data for Q3 2021: The gold production in Q3 2021, is expected to increase to between 115,000 and 125,000 ounces, driven by higher mining rates and grades at Young-Davidson, and increased production at Mulatos. While the total cash costs and AISC are expected to remain at similar levels to the second quarter, which is positive for the company.
• Production guidance for 2021: The Company continues to deliver on its key objectives and remains well positioned to meet full year guidance with production totalling 240,000 ounces of gold through the first half of 2021. For FY2021, the management highlighted strong production growth and expects to be in a range of 470,000 to 510,000 ounces of gold, a 19.4% increase from 2020 achieved numbers. Furthermore, they expect lower costs with total cash cost to be in a range of USD 710 to USD 760 per ounce, an 6.7% decrease from 2020 guidance.

Source: Company

• Significant liquidity: The Company's liquidity position remains strong, ending the second quarter with USD 233.9 million of cash and cash equivalents, USD 22.4 million in equity securities and no debt. Additionally, the Company has a USD 500.0 million undrawn credit facility, providing USD 756.3 million of liquidity. The Company expects to generate ongoing free cash flow in 2021 while continuing to fund its high return internal growth initiatives.

Financial overview of Q2 2021 (in millions of USD)

Source: Company

• In Q2 2021, the Company sold 107,581 ounces of gold for revenue of USD 195.1 million, a 55% increase against USD 126.2 million in the previous corresponding period mainly driven by higher realized gold prices and more ounces sold.
• Cost of sales elevated to USD 126.9 million in the reported period against USD 103.3 million in pcp, mainly due to higher mining and processing expenses along higher amortization.
• In Q2 2021, the company reported loss from operations at USD 168.5 million against a profit of USD 12.1 million, mainly due to impairment charges of USD 224.3 million.
• On the back of above discussed rationales the company reported net loss of USD 172.5 million inn Q2 2021, against a profit of USD 11.7 million in pcp.

Risks associated with the investment

The Company’s financial performance is mostly dependent on the price of gold, which directly affects their profitability and cash flow. Any drawdown in the gold prices would impact the group’s performance. 

Valuation Methodology (Illustrative): EV to Sales

 *1 USD = 1.26 CAD

Stock recommendation

The overall performance through the first half of 2021 has been solid, led by another strong quarter at Young-Davidson which continues to meet or exceed expectations operating from the new lower mine infrastructure. Combined with a stronger performance from Mulatos, the company remains well positioned to achieve full year guidance. It had a successful quarter on the exploration front at Young-Davidson and Island Gold with results from both operations highlighting the significant upside potential, in particular at Island Gold where it reported the best hole ever. Moreover, we are bullish on the gold prices and believe that despite a little pullback, gold, as an asset class would continue to remain in the limelight.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 9.83  as on August 30, 2021. We have considered Kirkland Lake Gold Ltd and Wesdome Gold Mines Ltd. as the peer group for the comparison.

*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

One-Year Technical Price Chart (as on August 30, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Turquoise Hill Resources Ltd.

Turquoise Hill Resources Ltd. (TSX: TRQ) is a global mining company that primarily mines copper, gold, and coal in the Asia-Pacific region.  The company holds a 66% interest in Oyu Tolgoi, one of the world's largest copper-gold-silver mines, which ships concentrate to customers in China.

Key Highlights:

• Encouraging FY21 Outlook: The company expects its FY21 Copper production in between 150,000 – 180,000 tonnes, higher than 149,631 tonnes in FY20, while it expects gold production within the range of 400,000 – 480,000 ounces, significantly higher than 181,858 ounces in FY20. Operating cash cost is expected in between USD 800 – 850 million, while the company expects USD 105 – 125 million allocated for Open pit and USD 0.9 billion to USD 1 billion for underground expenses.

Source: Company Presentation

• Positive Cash Flows: The company recorded impressive performance in the past, and posted cash from operations of USD 76.112 million in 6MFY21, as compared to a cash used of USD 106.276 million in pcp. The increase was driven by higher net income of USD 450.917 million in 6MFY21 v/s USD 91.274 million in pcp.
  

• Operational Highlights: During the second quarter of FY21, the company reported the following drilling activities:
  

1. The company would conduct exploration activities and confirmed three exploration licenses across Bag and Od-2 in the Ömnögovi province and Khatavch in the Dornogovi province.
2. Within the mine development, the group executed major lateral development and undercut drilling activities. As per the management, undercut technical criteria on track but schedule is under increasing pressure on account of rapidly evolving situation.

Q2FY21 Financial Highlights:

• TRQ announced its quarterly result, wherein the company posted revenue of USD 317.799 million, jumped from USD 277.967 million in the previous corresponding period (pcp). The increase was supported by strong surge in gold revenue, due to a 6.3% increase in the average price of gold and a 135.5% increase in volumes of gold. However, a slide in copper sales remained as a drag.
• Gross margin stood at USD 235.215 million, climbed from USD 96.011 million in pcp. The surge was supported by higher sales coupled with lower cost of sales.
• The quarter was marked by a higher operating expense, partially offset by lower corporate administration expenses.
• The group reported a net profit of USD 118.768 million, surged from USD 72.318 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Decline in the commodity prices would lead to a lower realization for the company and would subsequently hinder the company’s overall performance.

Valuation Methodology (Illustrative): Price to CF based

Stock Recommendations:

The company commands a higher margin than its peers, which indicates improved cost management. Gross margin and EBITDA margin stood significantly higher at 66.9% and 51% in Q2FY21, as compared to the industry median of 49.2% and 40.1%, respectively. The group reported a higher operating margin and net margin of 43.7% and 37.4% in Q2FY21, higher than the industry median of 25.1% and 15.7%, respectively. We have valued the stock using the P/CF based relative valuation method and have arrived at a double-digit upside (in percentage terms) upside. For the said purposes, we have considered peers like Southern Copper Corp, Freeport-McMoRan Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 18.70 on August 30, 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

One-Year Technical Price Chart (as on August 30, 2021). Analysis by Kalkine Group

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

Winpak Ltd

Winpak Ltd (TSX: WPK) manufactures and sells a variety of packaging materials and related packaging machines. The packaging materials are used primarily for perishable foods, beverages, and healthcare applications.

Key highlights

• Riding on a recovery mode: Pandemic-related business patterns remained throughout Winpak's operational sectors during the first half of the year, with reduced volumes in the foodservice and hospitality industries and strong volume growth in retail-related goods. However, the Company's foodservice and hospitality product segments began to show signs of improvement in client order levels in the second quarter, and this trend is projected to continue in the third quarter. The Company expects to be able to maintain the significant sales volume improvements recorded throughout the operational segments in the first half of 2021 for the remainder of the year.

• Arising pharmaceutical customers: The flexible lidding product group has added retort pet food and snack food volumes, and the specialised printed packaging product group, in conjunction with the recently launched strategic Wiicare healthcare partnership with "Wipak," the company's European sister company, will target growth opportunities with pharmaceutical customers. Wiicare is also looking for additional medical customers. Additionally, the packing machinery segment continues to generate a steady stream of machine orders, which will keep the operations busy for the rest of 2021.

• Industry beating margins: Despite the hard time, the management’s solid determination and cost saving strategies helped them leaping the industry median margins on many fronts in Q2 2021, which is a key positive as the higher margins indicate operational efficiency.
  

• Debt-free balance sheet with strong financial flexibility: In Q2 2021, the company has a strong balance sheet, which is virtually debt-free along cash and cash equivalents balance of USD 513.3 million, an increase of USD 17.0 million from the end of the prior quarter. Moreover, despite a sluggish economic scenario, the group reported consistent net cash flow from operations before changes in working capital of USD 49.6 million. The company is likely to report lower finance costs in the coming quarters, which would further support the group’s profitability.
  

Financial overview of Q2 2021 (In thousands of USD)

Source: Company

• In the reported quarter results the revenue increased by USD 27.8 million or 12.8% USD 243.9 million, compared to USD 216.2 million in the previous corresponding period. An increase in revenue was mainly due to higher volumes, which expanded by 9.7% in total.

• The group posted a gross profit of USD 69.6 million, compared to USD 68.0 million in the previous corresponding period (pcp). The marginal increase was due to a rise in revenue. The gross profit margins fell to 28.6% V/s 31.5% in pcp, on account of higher cost of sales.
• Income from operations stood at USD 38.4 million, against USD 40.3 million in the pcp, decline in income from operations was mainly due to higher sales and marketing expense.
• The company reported a net income of USD 29.4 million in Q2 2021, compared to USD 29.9 million in pcp.

Risks associated with investment

The company derives a significant part of the revenue from the food-service segment, and any further restriction would result in a slide in the overall volumes and financials. 

Valuation Methodology (Illustrative): EV to Sales

*1USD=1.26CAD 

Stock recommendation

The company is an essential supplier of packaging materials and machinery within the food, beverage and healthcare segments. New customer business volume gains from initial product launches within the rigid container product group really helped the group in posted elevated revenue. Furthermore, the Company’s foodservice and hospitality product segments started to show a recovery in customer order levels which is expected to gain further traction in the third quarter.  Additionally, the industry beating margin profile along robust liquidity with virtual debt free balance sheet reflect the efficiency of the true company. Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 43.31 as on August 30, 2021. We have considered CCL Industries Inc, Aptargroup Inc, Avery Dennison Corp, etc. as the peer group for the comparison.

*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

One-Year Technical Price Chart (as on August 30, 2021). Analysis by Kalkine Group

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

Parex Resources Inc.

Parex Resources Inc (TSX: PXT) engages in the exploration, development, and production of crude oil. The company brings technology utilized in the Western Canada Sedimentary Basin to South American basins with large oil-in-place potential.

Key Updates:

• Tremendous surge in Free Fund flow supported by elevated commodity prices: In the recent past, the company reported operational excellence supported by increase in realized sales price of crude oil at USD 56.21/boe in H1FY21, as compared to USD 29.75/boe in pcp. Operating netback stood higher at USD 469.376 million in H1FY21, significantly higher than USD 274.025 million in pcp. A higher operating net back indicates higher prosperity. Notably, the company reported free fund flow of USD 172.132 million in H1FY21, jumped from USD 59.514 million in pcp.
• Acquired 50% stake in Arauca and LLA-38 blocks: Recently, the company reported 50% stake in Arauca and LLA-38 blocks, located at the highly prolific Llano’s basin in the Arauca province of north-eastern Colombia. The above Blocks includes proved reserves along with development and drill ready exploration prospects. The company is planning to initiate drilling activities in the later part of FY21. Within the LLA-38 block, the company would focus on drilling, 3D seismic defined, Califa-1 exploration opportunities.

• Impressive margin profile: The group reported improved operational efficiencies and posted better margins than its peers, which is a key positive. EBITDA margin and operating margin stood at 73.2% and 61.8%, respectively in Q2FY21, higher than the industry median of 42.5% and 20%, respectively. The company is a zero-debt company and hence reports lower interest costs over the years. Net margin stood at 43.3% in Q2FY21, considerably higher than the industry median of 3.8%. Additionally, elevated Brent crude oil price has supported the company’s operating net back in the recent past, which is a key positive.
  

Q2FY21 Financial Highlights:

• PXT announced its quarterly result, wherein the company posted revenue of USD 211.594 million, jumped from USD 68.725 million in the previous corresponding period (pcp). The increase was driven by strong momentum from both Crude oil and natural gas segments. Notably, realized price stood at USD 59.68/boe v/s USD 19.25/boe in pcp.
• Total expenses stood at USD 80.896 million, slightly higher from USD 80.102 million in Q2FY20. The quarter was marked by higher production cost, increase in general & administrative expense and higher transportation costs, partially offset by lower purchased oil expenses.
• The group reported a solid bottom line growth, and reported net income of USD 91.662 million, significantly higher than USD 19.290 million in pcp.

  Q2FY21 Income Statement Highlights (Source: Company Reports)

Risks: The operation of the company is co-related with the crude oil prices, and price volatility is likely to remain as a drag for the company and would dampen its performance.

Valuation Methodology (Illustrative): Price to CF based

Stock Recommendation:  

For the second half of FY21, the company expects its production of 46,000-50,000 boe/day, higher than 45,332 boe/day in H1FY21. Fund flow provided by operations are expected in between USD 280-300 million in H2FY21, better than USD 257 million in H1FY21. Brent crude average realization price is forecasted at ~USD 70/ bbl in second half, higher than ~USD 65/bbl in the first half of FY21. We have valued the stock using the Price to CF based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered industry (Oil & Gas) mean on an NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 18.47 on August 30, 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

One-Year Technical Price Chart (as on August 30, 2021). Analysis by Kalkine Group

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

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.