Martinrea International Inc (TSX: MRE) is a Canada based manufacturer of metal parts and fluid management systems. Its products are used primarily in the automotive sector by the majority of vehicle manufacturers. 

Key highlights

• Strong growth led by a North American and European region: Despite the impact of the global pandemic on the automobile industry, the firm showed resilience in Q2 2021, expanding in North America and Europe. Revenues in the North American area increased by 99.9% to CAD 635.8 million from CAD 318.1 million in the previous quarter, while sales in Europe increased by a staggering 111%. The recovery of overall light vehicle production volumes following COVID was largely responsible for the increase.

Source: Company

• Optimistic Long-Term Outlook: Despite the current constraints, the firm is optimistic about its long-term prospects, owing to high customer demand for automobiles, low vehicle inventory levels, and a solid order book. Total sales are expected to be in the range of CAD 4.6-4.8 billion in FY2023, with an adjusted operating income margin above 8% and Free Cash Flow exceeding CAD 200 million.
  

• Ventured into electric vehicle battery production: The Company recently formed a 50/50 joint venture with NanoXplore called VoltaXplore to develop and build graphene-enhanced electric car batteries. We believe the company has unique technology that has the potential to provide a solution for producing electric car batteries that will assist governments and automakers in meeting ambitious objectives for electric vehicle production. 
  

Financial overview of Q2 2021 (in thousands of Canadian dollars)

Source: Company

• Sales in Q2 2021 increased by CAD 424.3 million or 92.1% to CAD 884.8 million compared to CAD 460.5 million in Q2 2020. An increase in sales was driven by healthy performance from the North America and Europe operating segments, partially offset by a slight decrease in the Rest of the World.
• Gross profit in the reported period improved to CAD 111.7 million against a loss of CAD 12.4 million in the previous corresponding period, mainly on the back of higher revenues.
• The group reported the gross margin of 12.6% in the reported period.
• Operating income in Q2 2021 stood at CAD 34.6 million against a loss of CAD 163.3 million in pcp, although it registered higher SG&A expenses.
• The company reported a net income of CAD 23.9 million compared to loss of CAD 146.8 million in pcp.
  

Risks associated with investment

Many risks are linked with the nature of the company's operation that might obstruct its performance. Some of these risks include a drop in demand from automotive manufacturers, supply chain disruptions, any technological development, increasing pricing of raw materials and commodities, etc. The company also hold a heavy debt in its books. 

Valuation Methodology (Illustrative): EV to EBITDA 

Stock recommendation

The company continued to experience short-term headwinds in the second quarter, as customer releases have fluctuated due to the shortage of semiconductors and other supply constraints. In addition, the group is progressing through a heavy new business launch cycle which is having a greater impact on margins than what is normal in a typical year. On a positive note, vehicle demand remains very strong, and vehicle inventories are at record lows. Furthermore, the company’s current launch activity is expected to generate future sales growth as well as strong margins once supply bottlenecks are removed, and production normalizes. Recently, the business launched VoltaXplore, a joint venture with NanoXplore to develop and create graphene-enhanced electric car batteries. As the demand for electric vehicles grows, we anticipate that this segment will provide new avenues for cash flow.

Therefore, based on the above rationales and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 11.25 as on September 30, 2021. We have considered American Axle & Manufacturing Holdings Inc, Linamar Corp, Magna International Inc, 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 September 30, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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