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:

• Sequential Improvement in Operating Metrics: In the first quarter of Q1FY22, the company reported a 30% q-o-q growth in production sales of CAD 1,102.4 million, driven by higher industry volumes and better product mix. Total sales stood at CAD 1,155.0 million, higher than CAD 1,053.4 million in Q4FY21, despite a significantly lower income from the tooling segment. Moreover, adjusted EBITDA stood strong at CAD 112.4 million, as compared to CAD 63.2 million in Q4FY21. Notably, adjusted EBITDA margin stood at 9.7% in Q1FY22, as compared to 6% on Q4FY21.

Source: Company Presentation 

• Strong Momentum from the North America: Within the North America region, the group witnessed a higher demand scenario driven by a recovery in production volumes of specific light vehicle platforms that were adversely impacted by the industry-wide shortage of semiconductor chips during 2021. Moreover, fresh launches and ramp up of new programs from the OEMs also supported the above growth. Notably, the company’s sales from North America grew 22.1% on y-o-y basis to CAD 859.7 million, reflecting ~74% of the total income.

• 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.

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. Moreover, rising inflation might lead to higher raw material costs and would subsequently weigh high on the company’s margins.

Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• In Q1FY22, the company posted its revenue of CAD 1,155.0 million, higher than CAD 997.1 million in pcp. The growth was aided by higher traction from both the North America and Europe geographies.
• The company reported a marginal improvement in the gross margin of CAD 122.4 million, as compared to CAD 120.8 million in pcp, supported by an elevated income as mentioned above, partially offset by a higher cost of sales.
• Operating income dipped to CAD 40.0 million from CAD 47.4 million in pcp, due to higher Research and development costs along with a surge in selling, general and administrative expense.
• MRE reported its net income of CAD 25.2 million, as compared to CAD 38.7 million in pcp, due to a lower operating income, partially offset by lower income tax 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. This is encouraging and 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 Magna International Inc, Superior Industries International Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of MRE at the last closing price of CAD 8.31 on May 09, 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 Price Chart (as on May 09, 2022). Source: Refinitiv (Thomson Reuters)

*The reference data in this report has been partly sourced from REFINITIV

Technical Analysis Summary

Disclaimer

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