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

• Got exclusive rights for modular battery pack technology: Recently, the company announced that it has entered into an exclusive Manufacturing and Licensing Agreement with Michigan -based eMatrix Energy Systems, Inc. to gain access to leading modular battery pack technology. The modular battery pack systems provide a highly competitive product offering to customers across Linamar's Mobility and Industrial business segments and we believe it would be a key positive.
• 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.
• 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 five quarters, which is noteworthy.

Source: Company

• 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 CAD 731.6 million, and the Company’s credit facilities had available credit of CAD 957.6 million. The Company believes this liquidity 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 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 recorded 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. 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 65.58 on October 04, 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 October 04, 2021) Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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