Martinrea International Inc. (TSX: MRE) is a Canada based global automotive supplier engaged in the design, development and manufacturing of highly engineered, value-added Lightweight Structures and Propulsion Systems.

Key Updates:

• Strong Momentum from the Europe geography: 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 within the European geography remained robust in 2021, supported by the recovery of overall light vehicle production volumes. Notably, in FY21, the company reported its income from the Europe geography at CAD 899.9 million, grew 31.6% on y-o-y basis.

• Encouraging Business Plan: Recently, the company disclosed its planning to commercialize the production of graphene-enhanced lithium-ion batteries for the electric vehicle market and announced the commissioning of its one megawatt-hour demonstration facility in Montreal, Quebec. As per the Management, the graphene-enhanced lithium-ion batteries are expected to offer increased battery life, faster charging speeds, and improved safety to the end users. Notably, this would be done through a 50/50 joint venture between MRE and NanoXplore Inc.

• Revival from the North America Segment: The majority of the company’s business derives from the North America Geography, and MRE posted its sales of CAD 2,737.4 million, reflecting a 7.9% y-o-y growth over FY20. The growth was aided by the new launches from the OEMs coupled with an increase in tooling sales of CAD 133.1 million, which are primarily dependent on the timing of tooling construction and final acceptance by the customer.

Risks associated with the investment:

Currently, the industry is going through semiconductor chips-set shortage, which is resulting to 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. 

  FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• In FY21, the company posted its revenue of CAD 3,783.9 million, higher than CAD 3,375.2 million in FY20. The growth was aided by higher traction from both the North America and Europe Geography.
• Cost of sales surged to CAD 3,218.2 million from CAD 2,748.8 million in FY20, which resulted to a weak gross margin of CAD 345.6 million, lower than CAD 415.0 million in FY20.
• The company witnessed a surge in the research & development costs, while a lower selling, general & administrative costs supported the profitability. MRE posted an operating income of CAD 62.9 million, compared to an operating loss of CAD 27.5 million in FY20, due by an inclusion of impairment of assets amounting CAD 85.7 million in previous year.
• MRE reported its net income of CAD 35.8 million, as compared to a net loss of CAD 27.3 million in FY20, supported by an operating profit as mentioned above coupled with lower finance expense.

Valuation Methodology (Illustrative): EV to EBITDA-based

Analysis by Kalkine Group

Stock Recommendation:

As per the management, demand for the light vehicle is likely to remain strong in 2022 due to the expected economic recovery, which would result in new launches from the leading automotive players, which is encouraging. This is expected to boost the demand for the company’s product and its order book in the coming quarters. We have valued the stock using the EV to EBITDA 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, Exco Technologies Ltd etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of MRE at the current market price of CAD 7.97 at 9.49 AM Toronto Time on April 07, 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 April 07, 2022, 9.49 AM Toronto Time). Analysis by Kalkine Group   

   Technical Analysis Summary

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