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

Key highlights

• Improved revenues in FY21: For FY21, the company reported an increase of 12% in total revenues to CAD 3.78 billion as compared to CAD 3.37 billion in FY20. The group's production sales rose to CAD 3.41 billion for the reported period vs CAD 3.15 billion, with a significant improvement from the European region. The tooling sales from North America rose to CAD 291.7 million for FY21 as compared to CAD 151.3 million in pcp. The primary reasons driving the sales were the launch of various segments of auto models such as Jeep Grand Cherokee and Wagoneer, Ford Mach E mustang, etc.  

• Dividend declaration: On March 3, 2022, the group announced a cash dividend of CAD 0.05 per share. The total dividend declared for FY21 stood at CAD 16.07 million which was in line with the previous year.

• Improved guidance: On March 3, 2022, the company came out with a brighter outlook for 2023, stating that total revenues including the tooling sales will be in the range of CAD 4.6 billion to 4.8 billion, which is approximately 24% higher than the FY21 revenues. Further, the adjusted operating income margin is projected to increase more than 8% and the Free cash flow is estimated close to CAD 200 million.

• Improving margins:For Q4FY21, the gross margins were 6% as compared to 5.2% in the previous quarter. The EBITDA margins also improved to 6% for the reported period vs 4.5% in Q3FY21. On the net margin front company is in negative for the past two quarters because of the chip shortage and supply chain disruptions, still, the group improved its net margins to a negative 0.9% from a negative 2.0% on a sequential basis.

Source: Refinitive, Analysis by Kalkine Group 

Risks associated with investment

The company is primarily dealing with automobiles and the major headwind the business is facing of the severe shortage of the semiconductor chips used in automobiles for production, rise in the cost of raw materials, and shortage of labor. With this few of the other risks company is exposed to are foreign exchange risk, counterparty risks, slowing in demand because of rising interest rates, etc.

Financial overview of FY2021 (Expressed in thousands CAD)

Source: Company Filing 

• The company reported an increase in revenues to CAD 3.78 billion in FY21 vs 3.37 billion in pcp. the rise was from majorly North American region from its tooling sales.

• The Gross margins dipped to CAD 345.62 million in the reported period vs CAD 415.09 million in pcp on account of higher raw materials, rising wages, and supply chain disruption.

• The group reported a higher operating income of CAD 62.91 million in FY21 as compared to the operating income of CAD 27.53 million in pcp.

• The company reported a Net Income for FY21 of CAD 35.88 million as compared to the Net loss of CAD 27.31 million in pcp.
  

Valuation Methodology (Illustrative): EV/ Sales multiples Based

Analysis by Kalkine Group 

Stock recommendation 

The company reported strong FY21 revenue numbers of CAD 3.78 billion with a growth of close to 12% with decent improvements across the European region. Though the multiple headwinds the company faced from semiconductor chips shortage, supply chain disruption, labor shortages, etc in past, the company is optimistic of achieving higher revenues in the range of CAD 4.6 billion to 4.8 billion in and its adjusted operating income margins exceeding 8% for the year 2023.

Recently the group entered a joint venture with NanoXplore Inc. (TSX: GRA), to commercialize the production of graphene-enhanced lithium-ion batteries for the electric vehicle market.  On the valuation front, the stock is measured on the Enterprise to Sales multiple base, and currently trading at 0.4x as compared to the industry median (Consumer cyclical) of 1.1x, which hints the stock is still undervalued, leaving the scope for the stock to match the industry valuations. We have considered Superior Industries International Inc., Linamar Corp., etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the current market price of CAD 8.44 at 9:50 AM Toronto time on March 10, 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 on March 10, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

Disclaimer

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