Magna International Inc.

Magna International Inc. (TSX: MG) is engaged in the manufacturing and distribution of automotive components. Its segments include Body Exteriors & Structures, Power & Vision, Seating System and Complete Vehicles.

Key highlights

• The bullish stance of Management for FY2020:The management showcased fresh perspective for FY2020, where they raised the adjusted EBIT margin expectations, to be in a range of 4-4.4%, compared to 2.9-3.3% as their previous guidance, while the net income attributable to Magna would be in a range of USD 850-975 million. The company also shared information for their upcoming Q4 2020, where they expect healthy growth over the Q4 2019, following is the table comprising those numbers:

Source: Company

• Free cash flows: The management took some prudent steps to reduce discretionary and structural costs, because of this the company garnered free cash flow of USD 1.3 billion in Q3 2020.

Source: Company

• Robust Liquidity:The company is enjoying strong liquidity. At the end of Q3 2020, the company had total liquidity of more than USD 5.3 billion comprising of Cash & Cash Equivalents of USD 1.6 billion, along with an unused credit limit of USD 3.7 billion.

Source: Company

Financial overview of Q3 2020 (U.S. dollars in millions, except per share figures)

Source: Company

• In Q3 2020, the Company’s Sales numbers decreased 2% to USD 9.13 billion, compared to USD 9.32 billion in the previous corresponding period. The fall in revenue was primarily due to lower assembly volumes and lower European light vehicle production.
• Cost of goods sold decreased USD 382 million to USD 7.68 billion in Q3 2020, compared to USD 8.06 billion in Q3 2019, primarily due to lower material, direct labour and overhead costs associated with lower sales.
• Based on lower other expenses, the income from operations before income taxes in Q3 2020 stood at USD 436 million, compared to a loss of USD 319 million in Q3 2019.
• In Q3 2020, the Company posted Net income of USD 405 million, compared to a loss of USD 233 million in the previous corresponding period.  

Risks associated with investment

Since the company is in the business of manufacturing of auto products, this involves many risks which can impact business operations as well as their financials. Some significant risks include deteriorating economic conditions, resulting in lower consumer confidence which typically translates into lower vehicle sales and production levels, commodities prices, inflation, foreign currency fluctuations, suppliers’ issue, Insolvency of OEMs, governmental regulation, etc. 

Valuation Methodology (Illustrative): Price to Earnings

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

We believe that the company is likely to achieve the sales figure of USD 31.5 – USD 32.5 billion for the year 2020. Apart from that, controlled operating expenses are likely to help the company in expanding its operating margins. Management is confident of achieving the Adjusted EBIT Margin in a range of 4% - 4.4%. Therefore, considering healthy balance sheet, average debt-equity ratio, good promoter pedigree, healthy dividend yield, efficient working capital management and valuation, we have given a ‘Hold’ recommendation at the closing price of CAD 79.44 on December 14, 2020. We have considered Lear Corp, Aptiv PLC, Borgwarner Inc etc. as the peer group for the comparison.

1-Year Price Chart (as on December 14, 2020). Source: Refinitiv (Thomson Reuters)

Disclaimer

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