Westport Fuel Systems Inc. (TSX: WPRT) provides high-performance, low-emission engine and fuel system technologies utilizing gaseous fuels. The company operates through four segments, namely, Original Equipment Manufacturer (OEM), Independent Aftermarket (IAM), the Cummins Westport Inc (CWI) Joint Venture, and Corporate.

Key Updates:

• Bullish Macros: The automotive industry is shifting towards more climate-friendly vehicles which is resulting to an increase traction for the low-emission engine and fuel system technologies using gaseous fuels. Moreover, on account of the growing demand for freight transportation segment, the medium- and heavy-duty trucks has also increased globally. We expect the momentum to sustain and would lead to higher sales volumes in the coming quarters.

• Growth from OEM segment: The company reported a higher revenue of USD 51.8 million in Q1FY22, which is higher than USD 42.7 million in pcp. The growth was supported by the positive impact from the recent acquisition of Stako sp. zo.o fuel storage business, increased light-duty OEM business sales volumes across India coupled with a higher sales volume from electronics segment. Additionally, the company’s heavy-duty OEM sales also reported a volume increase from the previous corresponding period, which also supported the growth.

• Prudent Capital Management: At the end of Q1FY21, the company reported its D/E ratio of 0.29x, as compared to the industry median of 0.47x. This indicates a higher financial flexibility and prudent capital management. Moreover, the company posted its long-term debt to capital of 14.8% in Q1FY22, which is lower than the industry median of 23.1%. A lower ratio indicates lower balance sheet risk, which is a key positive.

Risks Associated with the Investment:

The company derives a part of its revenue from Russia as it caters to several OEM and IAM players who have presence across Russia. Hence, the performance of the company might be hindered due to the ongoing conflict between Ukraine and Russia.

Q1FY22 Financial Highlights:

    Q1FY22 Income Statement Highlights (Source: Company Report)

• WPRT announces its Q1FY22 result, wherein the company posted its revenue of USD 76.5 million, marginally improved from than USD 76.4 million in pcp. The quarter reported higher income from OEM segment of USD 51.8 million v/s USD 42.7 million in pcp, while the IAM segment reported a slide in revenue of USD 24.6 million v/s USD 33.6 million in pcp.
• The company witnessed a higher cost of sales and surge in sales & marketing expense. Hence loss from operations stood higher at USD 10.8 million as compared to a loss of USD 8.1 million in Q1FY21.
• The company reported its net income of USD 7.3 million, as compared to a loss of USD 5.2 million in pcp. The surge was primarily due to a Gain on sale of investment amounting USD 19.1 million in Q1FY22.
  

    Valuation Methodology (Illustrative): EV to Sales based

    Analysis by Kalkine Group

Stock Recommendation:

Due to the change in the overall market dynamics along with continued adoption of alternative fuel systems and components for transportation applications, the industry is witnessing higher demand for low-emission engine and fuel systems. Hence, the opportunity for the low-emission engine and fuel system remains huge in the coming years and we believe, the company is highly poised to take advantage of the above opportunity arising from the sector.

We have valued the stock using the EV to Sales based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered peers like Manitex International Inc, Twin Disc Inc etc. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the last closing price of CAD 1.43 on May 09, 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 May 09, 2022). Source: REFINITIV, Analysis by Kalkine Group

  Technical Analysis Summary

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