Strong Liquidity Position to Combat Tepid Macros:   Magna International Inc. (TSX: MG) is engaged in the manufacturing and distribution automotive components. The company is engaged in designing, developing & manufacturing automotive systems, modules, and components, for original equipment manufacturers (OEMs) of light trucks & cars. 

On account of COVID-19 pandemic, the production has been reduced at the company’s facilities. However, the group’s China facility started working but with a lower production level. The group has withdrawn its 2020 outlook and provide details with the next release. The group has a decent liquidity which includes ~CAD 1 billion in cash and additional ~CAD 3 billion in credit lines.

MG paid a quarterly dividend of CAD 0.40 per share, reflecting a growth of 10% on y-o-y basis. During FY19, the dividend per share stood at US$ 1.46, as compared to US$ 1.32 in FY18.

FY19 Financial Highlights: MG declared its full-year results, wherein the company reported a 3% decline in sales to US$39.43 billion on account of weakening of foreign currencies against the U.S. dollar. Additionally, the decline in global light vehicle production and lower assembly volumes of several premium cars has taken a hit on the top line. SG&A expense as a percentage of revenue increase by 20 basis points from FY18 primarily due to higher labour and benefit costs. Adjusted EBIT stood at US$ 2.54 billion, as compared to US$ 3.10 million in FY18. The decline was an account of lower contribution from power & vision segment and body exteriors & structures business. Net income stood lower at US$ 1.63 million, as compared to US$ 2.33 million.

FY19 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: P/E Multiple Approach 

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of MG is trading at CAD 49.10 with a market capitalization of ~CAD 14.91 billion. The stock price corrected by ~18% and ~30% in the last one month and three-month, respectively on account of COVID-19 outbreak resulting slowdown in the industry. The stock bounced back sharply and generated a robust return of 14.88% in the past five trading sessions, outperforming the index by ~6.22%. At current market price, the stock is trading above its 20-day simple moving average (SMA) of CAD 43.7. The stock offers a dividend yield of 4.32%, which looks lucrative. The company maintains a strong portfolio of auto-component products with elite clientele lists. In the meantime, investors should take comfort from the company strong liquidity position of ~US$4 billion, while most of the manufacturing players are struggling with their working capital needs. Being one of the leading auto-ancillary players, we expect MG’s order book to improve as the economy stabilizes and returns to growth. We have valued the stock using the price to earnings (P/E) based relative valuation method. We have taken peers like Lear Corp (NYSE: LEA), BorgWarner Inc (NYSE: BWA), American Axle & Manufacturing Holdings Inc (NYSE: AXL) etc. and arrived at a target price of lower double-digit upside potential (in % terms). Hence, we recommend a buy rating on the stock at the closing market price of CAD 49.10 as on April 08, 2020.

MG One-Year Daily Price Chart (Source: Thomson Reuters)

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