Magna International Inc. (TSX: MG) is a mobility technology company and has 342 manufacturing operations and 91 product development, engineering, and sales centers and has operations across more than 27 countries.

Key Highlights:

• Breakthrough lightning update: The group recently announced the breakthrough lighting solution featured on the thermoplastic liftgate, which is also known as Litgate. This breakthrough lighting enables enhanced design freedom and also features various options which differentiate the brand and elevate the customer experiences. The company estimated the production of this to be ready by 2023.
  

• Reduced expenses: During Q1FY22, the company reported a decrease in the total cost of goods sold to USD 8.40 billion as compared to the total cost of goods sold of USD 8.66 billion in Q1FY21. The material cost sunk to USD 5.93 billion in the reported period (Q1FY22) against USD 6.19 billion in pcp, due to lower sales of the complete vehicles segment, which constitutes higher material components, thereby group reported overall reduced material costs. The direct labor and overhead expenses also declined in Q1FY22, resulting in the lower cost of goods sold.  
  

• Industry beating cash conversion cycle: The group reported its cash conversion cycle for Q1FY22 of 35.3 days which is lower than the industry median of 53.0 days. The lower cash conversion cycles illustrate how quickly a company can convert the investment in the form of inventory to cash, and hence be able to rotate its cash faster.
  

• Efficient debt management: During Q1FY22, the company managed the debt very efficiently which is lower than the industry median, and similar is shown in the graph below.

Source: Refinitiv, Analysis by Kalkine Group

Risks associated with investment

The company is vulnerable to the slowdown in economic activity, and rising interest rates that could curb the business expansion and demand for its products. Also, the group has to constantly seek the technology up-gradation and the increased competition can lead to price wars, which can further deteriorate the profit margins. 

Financial overview of Q1FY22 (Expressed in millions of USD)

Source: Company Filing 

• During Q1FY22, the company reported a decrease in its revenues to USD 9.64 billion as compared toth sales of USD 10.17 billion in Q1FY21. The decline in sales was because of the dip in the global light vehicle production by 7% and majorly the decline of 16% was seen in Europe, which resulted in the weaker sales in the reported period.

• The income from operations before income taxes also decreased to USD 420 million in Q1FY22, against USD 805 million in pcp.

• For Q1FY22, the company reported net income of USD 364 million which is lower than the net income of USD 615 million in Q1FY21.
  

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock Recommendation:

The group recently announced the breakthrough lighting, which will be a key differentiator for its brand and gives an enhanced experience to the users, which is a key positive. Further, in the scenario of rising interest rates, the management is very cautious in terms of leveraging and has maintained its debt levels below the industry median. The company has controlled its costs of goods sold to USD 8.4 billion during Q1FY22 as compared to USD 8.66 billion in the pcp, which helped the group in sustaining during the tough times. Recently, the company declared a dividend of CAD 0.45, which was paid on May 27, 2022. On the valuation front, the stock is measured on the EV/ Sales based relative valuation multiple and the stock is currently trading at 0.6x as compared to the industry (consumer cyclicals) median of 1.0x, suggesting the stock is still undervalued. We have considered  Lear Corp., Adient PLC., etc as the peer group for the comparison.

Therefore, based on the above rationale, and valuation, we recommend a “Hold” rating on the stock of MG at the last closing price of CAD 78.33 on June 10, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as of June 10, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

Disclaimer

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