Martinrea International Inc. (TSX: MRE) is a Canadian producer of steel and aluminum parts and fluid management systems. The company's products are used primarily in the automotive sector by vehicle manufacturers.

Key Updates:

• Europe continued to shine amidst the semiconductor chips shortage: 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 from the European geography remained robust in 2021, supported by the recovery of overall light vehicle production volumes. Notably, in 9MFY21, the company reported its income from the Europe geography at CAD 660.8 million, grew 47.1% on y-o-y basis.

• Higher dividend distribution amidst turbulent times: Amidst the sluggish economic growth, the company reported higher dividend distribution of CAD 12.0 million in 9MFY21, as compared to CAD 11.6 million in pcp. This is impressive as most of the firms has lowered their distribution in order to retain liquidity.

• Bullish management stance: In FY22, demand for the light vehicle is likely to remain strong, and hence the industry is witnessing new launches from the leading automotive players, which is encouraging. We expect the momentum to continue in the coming quarters and would further lead to an improved order book.

Risks: The quarter was impacted by an industry-wide shortage of semiconductor chips, which further resulted in 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.

Q3FY21 Financial Highlights:

Q3FY21 Income Statement Highlights (Source: Company Report)

• MRE reported its third quarter result, wherein the company posted revenue of CAD 848.4 million, as compared to CAD 971.0 million in pcp. The decrease was due to overall lower industry volumes, mainly as a result of the impact the industry-wide shortage of semiconductor chips on account of the COVID-19 pandemic, which impacted OEM production of specific light vehicle platforms.
• The group witnessed an increase in Research & development costs (CAD 8.3 million v/s CAD 6.8 million in pcp), partially offset by lower Selling, general & administrative costs (CAD 53.9 million v/s CAD 64.5 million in pcp). MRE posted an operating loss of CAD 16.2 million as compared to an operating income of CAD 75.5 million in pcp.
• The group reported its net loss of CAD 17.1 million, as compared to a net profit of CAD 45.6 million in pcp.
  

Valuation Methodology (Illustrative): Price to Earnings-based

Analysis by Kalkine Group

Stock Recommendation:

The company’s Adjusted EBITDA stood at CAD 254.3 million in 9MFY21, as compared to CAD 233.7 million in pcp. This is an indication of improved operational performance. We have valued the stock using the P/E 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 Linamar Corp, Magna International Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of MRE at the closing price of CAD 10.58 on February 01, 2022.

One-Year Technical Price Chart (as on February 01, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary:

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

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