One Small-cap Consumer Cyclical Stock to Bet on - MRE

Martinrea International Inc. (TSX: MRE) is a Canada based global automotive supplier engaged in the design, development and manufacturing of highly engineered, value-added Lightweight Structures and Propulsion Systems.

Key Updates:

• Growing traction from Europe: Since the arrival of Covid 19, the industry is facing a huge shortfall in the semiconductor chipset, which has largely impacted the OEM production of certain vehicle platforms in the recent past. Despite the above crisis, the group’s performance within the European geography remained robust in 2021, supported by the recovery of overall light vehicle production volumes. Notably, in FY21, the company reported its income from the Europe geography at CAD 899.9 million, grew 31.6% on y-o-y basis.

• Decent performance from North America: The majority of the company’s business derives from the North America Geography, while the company reported its sales of CAD 2,737.4 million, reflecting a 7.9% y-o-y growth over FY20. The increase was driven by new launches from the OEMs coupled with an increase in tooling sales of CAD 133.1 million, which are primarily dependent on the timing of tooling construction and final acceptance by the customer.

• Update on the commercialization of graphene-enhanced lithium-ion batteries: Recently, the company disclosed its planning to commercialize the production of graphene-enhanced lithium-ion batteries for the electric vehicle market and announced the commissioning of its one megawatt-hour demonstration facility in Montreal, Quebec. As per the Management, the graphene-enhanced lithium-ion batteries are expected to offer increased battery life, faster charging speeds, and improved safety to the end users. Notably, this would be done through a 50/50 joint venture between MRE and NanoXplore Inc.

Risks associated with the investment:

Currently, the industry is going through semiconductor chips-set shortage, which is resulting to a slump in OEM production and hence sluggish demand for automotive parts. Continuation of the above trend would dampen the company’s upcoming sales volumes. 

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• MRE reported its full-year result, wherein the company posted revenue of CAD 3,783.9 million, higher than CAD 3,375.2 million in FY20. The growth was driven by higher traction from the North America and Europe Geography.

              Source: Company Report

• Cost of sales exceed to CAD 3,218.2 million from CAD 2,748.8 million in FY20, which resulted to a weak gross margin of CAD 345.6 million v/s CAD 415.0 million in FY20.
• The group witnessed a surge in the research & development costs, while a lower selling, general & administrative costs supported the profitability. MRE posted an operating income of CAD 62.9 million, compared to CAD 27.5 million in pcp.
• The group reported its net income of CAD 35.8 million, as compared to a net loss of CAD 27.3 million in FY20, supported by an operating profit as mentioned above coupled with lower finance expense.

   Valuation Methodology (Illustrative): EV to EBITDA-based

Analysis by Kalkine Group

Stock Recommendation:

Despite the current economic turbulence, the company reported a higher dividend payment of CAD 16.0 million in FY21, as compared to CAD 15.6 million in FY20. This is impressive as most of the companies are lowering their distribution in order to retain liquidity. We have valued the stock using the EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry peers like Abc Technologies Holdings Inc, Magna International Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of MRE at the last closing price of CAD 9.06 on March 24, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 24, 2022). Analysis by Kalkine Group

Technical Analysis Summary

Disclaimer

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