Finning International Inc

Finning International Inc. (TSX: FTT), is a dealer and distributor of heavy-duty machinery and parts of the Caterpillar brand. The company sells and rents Caterpillar machinery to the mining, construction, petroleum, forestry, and power system application industries and further provides parts and services for equipment and engines to its customers via its owned distribution network and buys and sells used equipment domestically and internationally after reconditioning or rebuilding the machinery.

Key highlights 

• Increase in free cash flows: Strong EBITDA to free cash flow conversion resulted in free cash flow of CAD 316 million in Q3 2020, higher than the CAD 165 million free cash flow generated in Q3 2019, further strengthening the financial position. Net debt to EBITDA ratio improved in Q3 2020, and stood at 1.6 times, as against 2.6 times in the previous corresponding period.

Source: Company 

• Ample liquidity: The company is maintaining a healthy balance sheet with cash and cash equivalents of CAD 453 million in Q3 2020, as against CAD 268 million on December 31, 2019. To complement this, the company had approximately CAD 2.6 billion in credit facilities, out of this approximately CAD 1.6 billion was available on September 30, 2020. 

• Consistent dividend distribution: The company has a strong history of dividend payment, which establishes the fact that the company’s business is resilient and has reported stable cash flows over the years. The company announced a quarterly dividend of CAD 0.205 per common share, payable on December 3, 2020, to shareholders with a record date of November 19, 2020.   

Financial overview of Q3 2020

Source: Company 

• In Q3 2020 the company posted net revenue of CAD 1.4 billion, decreased by 21% as against CAD 1.9 billion in Q3 2019, primarily due to reduced market activity in Canada and South America. Net revenue was lower in all the operations and most lines of business, primarily new equipment, and product support revenue. Compared to Q2 2020, net revenue was up 8%, driven by a recovering market in the UK & Ireland and modest market improvements in Canada and South America. 

Source: Company 

• The Company reported an increase of 6% in EBIT to CAD 138 million. EBIT margin improved to 9.6% in Q3 2020, as against 7.1% in Q3 2019. The increase in EBIT was driven by lower SG&A, reflecting the successful execution of global productivity initiatives and tight cost control. The company expects to deliver more than CAD 100 million of annualized cost savings.
• The company reported a net income of CAD 88 million compared to CAD 76 million in the previous corresponding period. 

Risk associated with investment 

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 (Illustrative): Price to Cash Flow

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Due to the sluggish industrial scenario, the company witnessed an overall reduction in customer demand as there was a delay or suspension in the client’s activities in H1 2020. Still, in Q3 2020, the company witnessed some sequential end market improvements, particularly in rental and product support activity as customers resumed work and machine utilization hours increased.

The company also expects that most of its markets will continue to improve in Q4 2020 and into 2021 as mining trucks have gone back to work, strengthened copper prices are supporting recovery and growth in activities. Therefore, based on the above rationale and valuation, we have given a “Hold” rating at the closing price of CAD 27.04 on December 1, 2020. We have considered Cervus Equipment Corp, Toromont Industries Ltd, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

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