Westport Fuel Systems Inc (TSX: WPRT) is a provider of high-performance, low-emission engine and fuel system technologies utilizing gaseous fuels. The company segment includes Original Equipment Manufacturer (OEM), Independent Aftermarket (IAM), and Corporate. It generates maximum revenue from the OEM segment.

Key Updates:

• Depressing Cash flows: In Q1FY22, the company reported net cash used in operating activities of CAD 16.8 million, significantly higher than cash used in operations of CAD 2.5 million in pcp. This was primarily due to a weak working capital management, which is a key negative. Notably, this might lead to liquidity crisis.

• Lengthy Cash cycle days: In Q1FY22, the company reported its cash conversion period of 141 days, significantly higher than the industry median of 109.8 days. This indicates that the company takes higher time to convert its investments to cash flows, which remains a key concern for the group.
  

• Gloomy Margins: In Q1FY22, the company reported a negative EBITDA margin and negative operating margin of 9.1% and 14.1%, respectively, as compared to the industry median of 15% and 9.2%, respectively. This indicates weak cost management and poor operational efficiency and remains a major concern for the company.

  Valuation Methodology (Illustrative): EV to Sales Based

Analysis by Kalkine Group

Stock Recommendation:

The company’s reported higher input costs, which has resulted to a depressing margin on an operational level. Notably, the company reported a loss from operations of CAD 10.8 million in Q1FY22 v/s CAD 8.1 million in pcp.  Continuation of the above trend is likely to lead to weak impact the company’s overall profitability and cash flows. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like Manitex International Inc, Blue Bird Corp and FreightCar America Inc etc. Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock of WPRT at the last closing price of CAD 1.49 on June 10, 2022.

One-Year Technical Price Chart (as on June 10, 2022). Source: REFINITIV, Analysis by Kalkine Group

The reference data has been partly sourced from REFINITV

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