Martinrea International Inc.

Martinrea International Inc. (TSX:MRE) is a Canada-based company that is engaged in the development and production of metal parts, assemblies and modules, fluid management systems and aluminum products focused primarily on the automotive sector.

Investment Rationale

• Discounted Valuation: From the TTM PE multiple standpoint, MRE shares are trading at a single digit P/E multiple of 9.73x, whereas peer’s average TTM P/E multiple stood at 13.53x. This implies a valuation gap of ~28% between MRE shares and average industry peers. And a value buy for the potential investors.

Source: REFINITIV, Analysis by Kalkine Group

• An Income Play: MRE shares are yielding decent on the TSX, offering a dividend yield of ~1.810%, which is ~1.10 times of the Canada’s investment grade Government Bond Yield of 1.66%. Moreover, since 2013, the company has a track record of consistent dividend payment regardless of the economic cycle. A relatively higher yield and consistency in dividend payment will attract income seeking investors.

Dividend Payment History. Source: REFINITIV, Analysis by Kalkine Group

• Short-term challenges, Long-term outlook promising: The fiscal quarter just gone by (Q3FY21) was challenging for the company, as supply chain issues and cost inflation of labour, materials and energy, are currently wreaking havoc on the automotive supply base. As the company move into 2022 and into 2023, their plant launch activity, and the costs that go along with it, are expected to normalize. These launches are expected to generate future sales growth outpacing industry production growth over a multi-year period, as well as strong margins once supply bottlenecks are removed, and production normalizes.

Risk Associated

MRE exposed to several risks including, inflationary pressure on raw material prices, suppressed margin, semiconductor shortage, labour shortage, supply chain bottlenecks and slowdown in demand for automotive.

Financial Highlights: Q3FY21

Source: Company Filing

• Revenue reported in Q3FY21 was down by ~12.6% on a YoY basis to CAD 848.5 million vs. CAD 971.1 million reported in the same quarter of the previous financial year. This was mainly driven by year-over-year decrease in the North America and Rest of the World operating segments, partially offset by a year-over-year increase in the Europe operating segment.
• Gross margin plummeted to 5.9% in Q3FY21 vs. 15.6% reported in the same quarter of the previous financial year.
• Net-debt-to-Adjusted EBITDA ratio increased to 2.5x in Q3FY21, up from approximately 1.8x reported in the previous quarter.
• The board has declared a quarterly cash dividend of CAD 0.05 in Q3FY21.

Valuation Methodology- EV to EBITDA 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

Q3FY21 results were impacted by the global semiconductor shortage and other supply chain issues, labour and energy, sales mix, cost inflation in materials and costs related to a heavy new business launch cycle. However, on a positive note, vehicle demand remains strong, and vehicle inventories are at record lows, so the longer-term outlook is very good.

Also, we believe that short-term challenges has already priced-in at current level, and a single digit TTM P/E multiple of the company suggests that the stock is available at the bargained valuation.

Hence, based on the above rationale and valuation done, we recommend a “Speculative Buy” rating on MRE stock at the closing price of CAD 11.05 (on November 15, 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 November 15, 2021). Source: REFINITIV, 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.