Finning International Inc.

Finning International Inc. (TSX: FTT) is a leading dealer and distributor of heavy-duty machinery and parts under the brand called Caterpillar. The Group sells and rents Caterpillar machinery primarily to the mining, construction, petroleum, forestry, and power system application industries.

Q2FY20 Financial Highlights: Finning International announced its quarterly results, wherein the company posted revenue of CAD 1,419 million, reflecting a fall of 34% on y-o-y basis. The decline was majorly attributable to a 24% reduction in Canada’s product support revenue, as many customers parked equipment fleets and temporarily halted in the operations due to low commodity prices and COVID-19 restrictions. The company saw a free cash flow growth to CAD 312 million against a cash outflow of CAD 162 million, while year-to-date free cash flow stood at CAD 262 million, as compared to CAD 292 million in the previous corresponding period (pcp). The company reported EBITDA at CAD 130 million, representing a decline of 39% on y-o-y basis while EBITDA margin fell to 9.7%, as compared to 10.7% in pcp. Meanwhile, SG&A declined by 12% on y-o-y basis, due to effective cost management and lower variable costs. Further, the company reported CAD 64 million of wage subsidy during the quarter, which has been categorized as other income. Net income plunged to CAD 18 million as compared to CAD 88 million in the previous corresponding quarter.

Q2FY20 Financial Snapshot (Source: Company Reports)

Risks: The second wave of COVID-19 might affect the operations of oil & gas and mining industry players. Players from these industries are the key customers for the group. Hence, any such scenario would hamper the group’s performance.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock corrected 21% so far this year amid market volatility in the equity market. The Company’s operations have been dampened significantly in the recent past as the majority of the clients have post-pone their capital expenditures for a while due to a slide in the revenue of the Company. The group mentioned that the market had shown sign of recovery since May, with notable increases in the rental activity, machine utilization hours, and product support revenue run rates. With the recent recovery in oil prices, most oil sands producers have put their truck fleets back to work and are expected to be operating at pre-COVID-19 levels by the end of August. The price of copper has also improved, providing continued support and stability for copper mining in Chile. In the UK and Ireland, construction and power systems projects have resumed, and earthmoving work on the High-Speed Rail 2 mega-project, which represents a significant opportunity for the group. However, increased cases of COVID-19 infections in South America have presented a significant challenge to the group’s customers and operations in the region. Further, the company continue to distribute dividend amid the current challenging time, which shows the financial flexibility of the firm. At the last traded price, the stock was offering a dividend yield of 4.12%, which is lucrative considering the current interest rate environment. We have valued the stock using Price to CF based relative valuation method and have arrived at a target downside of higher single digit (in percentage terms). For the said purposes, we have considered peers like United Rentals Inc, Wartsila Oyj Abp etc. Hence, we recommend a ‘Buy’ stance on the stock at the closing market price of CAD 19.91 on August 31, 2020.

FTT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.