Toromont Industries Ltd

Toromont Industries Ltd (TSX: TIH) is a Canadian industrial company, which operates through two segments: Equipment Group and CIMCO. The larger segment by revenue, Equipment Group includes a Caterpillar dealership and rental operation of construction equipment. CIMCO offers solutions for the design, engineering, fabrication, and installation of industrial and recreational refrigeration systems.

Key Updates:

• Margins outperformed the industry median: The group reported decent margins during Q4FY20, which stood higher than the industry median, driven by higher operational efficiency. EBITDA margin and operating margin stood strong at 17% and 12.8%, respectively, as compared to the industry median of 13.2% and 10.9%, respectively. Moreover, the group reported a net margin of 9%, slightly higher than the industry median of 6.4%. 

• Bullish technical indicators: The stock closed above the 100-days, 150-days and 200-days SMAs, indicating a bullish pattern. Closing above the long-term support levels indicates a strong bullish trend supported by higher investor’s interest driven by improved financial metrics. The stock gained ~26% and ~49% in the last six months and nine-months, respectively and closed near the upper band of its 52-weeks trading range of CAD 94.86 and CAD 52.36.

(Source: Refinitiv, Thomson Reuters)

• Improved performance on sequential quarter basis: The group reported improvement in revenue, gross profit and operating income to CAD 992.2 million, CAD 244.5 million and CAD 127.2 million, respectively, higher than CAD 921.7 million, CAD 226.6 million and CAD 112.9 million, respectively. Moreover, net income surged to CAD 89 million, as compared to CAD 77.4 million in pcp. A sequential an improvement suggests improved sectoral scenario, which is a key positive. 

FY20 Financial Highlight:

• TIH announced its full-year results, wherein the group posted CAD 3,478.897 million, as compared to CAD 3,678.705 million in the previous year.
• Gross profit stood lower at CAD 835.746 million, as compared to CAD 906.122 million in FY19.
• The group’s operating income was recorded at CAD 372.434 million, declined from CAD 412.495 million in pcp, due to lower gross profit, partially supported by lower selling and administrative expenses (CAD 463.312 million versus CAD 493.627 million in pcp).
• Net earnings were recorded at CAD 254.915 million, as compared to CAD 286.800 million in FY19.
• The company reported a cash balance of CAD 591.128 million, while total assets were recorded at CAD 3,346.792 million.

FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company derives majority of its income from the infrastructure projects and other construction activities, which remain halted due to the government restrictions during COVID 19 pandemic. Further restrictions would dampen the company’s income and cash flows.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

With the recovery in the industrial and mining activities, the group reported impressive growth in its backlog to CAD 557.4 million as of December 31, 2020, higher than CAD 394.8 million in FY19. Cash from operations stood at CAD 349.028 million, significantly higher than CAD 146.030 million, supported by strong working capital management. We have valued the stock using Price to CF based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Finning International Inc, MSC Industrial Direct Co Inc, SiteOne Landscape Supply Inc etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 92.13 on February 18, 2021.

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

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