Strong Business Model, Robust Growth in Used Equipment: Toromont Industries Ltd (TSX: TIH) offers industry-leading rental operations, a complementary material handling business and an agricultural equipment business. The Group operates through two business segments, namely, the Equipment Group and CIMCO.

The Group declared a quarterly dividend of CAD 0.31 per ordinary share, reflecting a 14.8% q-o-q growth, payable on June 9, 2020.

Q1FY20 Financial Highlights: TIH announced its quarterly results, wherein the Group reported revenues of CAD 715.46 million, as compared to CAD 699.97 million in pcp. The increase was supported by strong performance within the used equipment sales and product support segment. However, a 13% y-o-y decline in CIMCO segment followed by a slump in the operating activities during the latter part of the quarter remained as a drag. Operating income fell to CAD 55.24 million from CAD 58.78 million in the previous corresponding period due to tight pricing and lower rental fleet utilization. An increase in the cost of goods sold and increase in selling & administrative expenses further aided the decline. Net earnings stood at CAD 37.39 million, as compared to CAD 39.26 million Q1FY19 due to a marginal increase in the income tax expense, partially offset by higher interest and investment income.

Q1FY20 Income Statement highlights (Source: Company Reports) 

Valuation Methodology (Illustrative): Price to Cash Flow-based Methodology

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

Stock Recommendation: The stock stood resilient in the recent past and made a marginal correction of ~8% in the last one year amidst the sharp correction across the broader market due to ongoing COVID-19 crisis. The Group’s offerings are deemed essential as it serves sectors like food production, storage and distribution networks, power generation including back-up power, critical infrastructure, transportation and emergency response etc. To weather the current COVID 19 crisis, TIH’s executive team and the Board of Directors have opted for voluntary compensation reductions. The performance of the company has been impacted by demand destruction and lower economic activities due to weak outlook. However, the company has a strong financial position and relatively resilient business. We have valued the stock using Price to CF-based relative valuation and considered Finning International Inc (TSX: FTT), Stantec Inc (TSX: STN), WSP Global Inc (TSX:  WSP) etc. as peer group and arrived at a target price which implies a potential upside in double-digit (in percentage terms). Hence, we recommend a ‘Buy’ on TIH stock at the closing price of CAD 62.86 as on May 01, 2020.

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

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