Martinrea International Inc. (TSX: MRE) is a Canadian producer of steel and aluminum parts and fluid management systems. Its products are used primarily in the automotive sector by most vehicle manufacturers. The group is engaged in the design, development, and manufacturing of highly engineered, value-added lightweight structures, and propulsion systems.

Key Highlights:

• Increased revenue: For Q1FY22, the company reported an increase in the revenue to CAD 1,155 million as compared to the revenue of CAD 997.2 million in Q1FY21. The sales from North America rose to CAD 859.7 million in the Q1FY22 against the sales of CAD 704.13 million in the Q1FY21, whereas the revenue from the European region increased marginally to CAD 261.46 million vs CAD 254.06 million in Q1FY21.

Source: Company presentationSequential improvement in the margins: During Q1FY22, the company reported increased revenue because of higher production, which was partially offset by the increase in expenses, but still the company outpaced profitability margins on a sequential basis when compared with Q4FY21.

Source: Refinitiv, Analysis by Kalkine Group

• Increased adjusted EBITDA: The company stated an increase in the adjusted EBITDA in Q1FY22 to CAD 112.37 million as compared to the adjusted EBITDA of CAD 109.81 million in Q1FY21. This increase was primarily driven by higher depreciation and finance expenses in Q1FY22 as compared to Q1FY21.

• Brighter outlook: The management is optimistic to meet its target for 2023 which includes the production sales (excluding tooling sales) between CAD 4.6 billion to CAD 4.8 billion and an adjusted operating income is estimated to increase by over 8%. Further, the group has projected to generate free cash flow of CAD 200 million for FY23.

Risks associated with investment

The company is facing a major hurdle of semiconductor chip-set shortage, which is impacting OEM production, resulting in the declining supply for automotive parts. Further, the rising interest rates, economic slowdown, COVID-19 restrictions, etc. are few other risks company is facing.   

Financial overview of Q1FY22 (Expressed in thousands of CAD)

Source: Company Filing 

• During Q1FY22, the group reported an increase in revenues to CAD 1,155.03 million versus the revenue of CAD 997.15 million in Q1FY21. The sales from North America rose significantly in Q1FY22 on account of the recovery in the production volume of certain light vehicle platforms and the launch of new programs previously.

• The gross margin for Q1FY22 increased to CAD 122.43 million as compared to CAD 120.85 million in Q1FY21.

• The operating income during Q1FY22 declined to CAD 40.04 million against the operating income of CAD 47.43 million in Q1FY21. The impact of higher sales was offset by the increase in the overall expenses which resulted in a lower operating income in Q1FY22.

• The group reported a decrease in net income for Q1FY22 at CAD 25.20 million against CAD 38.70 million in Q1FY21.
  

Valuation Methodology (Illustrative): EV/ EBITDA based

Analysis by Kalkine Group

Stock Recommendation:

The group recently declared a cash dividend of CAD 0.05 per share which will be payable on or about July 15, 2022. During Q1FY22, the company came out with a strong revenue of CAD 1,155.03 million against the CAD 997.15 million in Q1FY21, also the company reported an increase in adjusted EBITDA of CAD 112.37 million in the same period (Q1FY22) vs the adjusted EBITDA of CAD 109.81 million in Q1FY21. The group is optimistic to meet its FY23 target of production sales which is estimated between CAD 4.6 billion to CAD 4.8 billion, along with the generation of free cash flows of CAD 200 million.  On the valuation front, the stock is measured on the EV/ EBITDA based valuation multiple and the stock is currently trading at 0.4x as compared to the industry (consumer cyclicals) median of 0.9x, suggesting the stock is still undervalued. We have considered ABC Technologies Holdings Inc., American Axle & Manufacturing Holdings Inc., as the peer group for the comparison. 

Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock of MRE at the last closing price of CAD 9.85 on May 31, 2022. Additionally, the 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 of May 31, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

Disclaimer

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