Linamar Corporation

Linamar Corporation (TSX: LNR) is engaged in the manufacturing of powertrains and drivelines for vehicle and power generation markets and operates under two business segments, namely, Transportation and Industrial. Within the Transportation segment, the company develops and manufactures precision metallic components, modules and systems used in vehicles and power generation machines.

Key Highlights:

• Sufficient Liquidity levels backed by higher free cash flow: The company reported a robust liquidity level of CAD 1.6 billion in Q1FY21, which is higher than CAD 1.2 billion in Q1FY20. This includes CAD 957.5 million of funds available under credit facilities. The increase in liquidity level was partially supported by higher free cash flow, which stood at CAD 166.2 million in Q1FY21, as compared to CAD 147.1 million in the previous corresponding period (pcp). The Management believes that the above liquidity is sufficient to meet the company’s short-term working capital needs and capital investments.
• Strong Revival from the Industrial segment: The company witnessed a demand revival from the industrial segment supported by higher agricultural sales in North America, which resulted in higher demand from telehandlers, scissors and booms, further leading to an improved market share. Notably, in Q1FY21, the company reported a 70% y-o-y growth from the Asia region supported by demand recovery from lower restrictions in specific regions. For FY21, demand from the above segment looks promising, and LNR expects a double-digit growth from NA and EMEA regions. Moreover, the equipment utilization levels are expected to reach pre-covid levels, which would further spur the demand dynamics.
• Improved Light Vehicle demand: Global demand for the light vehicle has increased in the recent past, as sales volumes across Europe, US and Chine recovered due to lower lockdown restrictions. Moreover, global productions have recovered in the recent past and is expected to grow by 12% y-o-y in FY21, which looks promising. The company provides innovative design & engineering solutions to enhance cost- effective solutions to OEM clients, which have a world-wide presence. We believe the company is highly poised to take advantage of the growing demand arising from the industry.
  

Source: Company Presentation

Q1FY21 Financial Highlights:

• LNR impresses with its quarterly results, wherein the group posted sales of CAD 1,781.857 million, versus CAD 1,549.765 million in the previous corresponding period (pcp). The increase was driven by the strong performance from the automobile sector across Asia and North America.
• Operating earnings soared to CAD 221.236 million, from CAD 117.940 million in the previous corresponding period (pcp). The growth was supported by higher sales coupled with a decline in the selling, general and administrative expenses.
• Net earnings stood higher at CAD 153.532 million, jumped from CAD 78.486 million in the previous corresponding period (pcp).

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Extension of lockdown restrictions would lead to a decline in the global demand and may dampen the company’s supply chain and logistics segment. This might take a toll on the company’s overall performance.

Valuation Methodology (Illustrative): P/E based valuation.

Stock Recommendation:

In Q1FY21, the group witnessed a significant reduction in the total debt to CAD 980.829 million, from CAD 1,303.214 million in Q4FY20, which reflects a decline of 24.74%. This is impressive and an indication of prudent capital management. Moreover, D/E improved to 0.22 in Q1FY21, from 0.30 in Q4FY20, which encouraging. We expect the demand for the company’s offerings to improve following the expectation of revival in the automobile sector. Based on technical analysis, the stock has support at CAD 65.0 level. We have valued the stock using the P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered the peers like Dana Inc, and NFI group etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 75.04 on July 09, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

One-Year Technical Price Chart (as on July 09, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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