Martinrea International Inc. (TSX: MRE) is a Canadian based company which manufactures steel and aluminum parts and fluid management systems for the vehicle manufacturers.

Key Updates:

• Improved traction from Europe: 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 the sluggish economic growth, the company paid higher dividend 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.

• Trading at a lower valuation: MRE shares are available at EV to Sales multiple of 0.5x times, as compared to the industry (Consumer Cyclicals) median of 1.20x and on NTM basis. Price to Earnings multiple of the stock is at 6.5x against the industry median of 10.90x. This implies that the shares are undervalued against the industry and hence, investors can accumulate the stock at the current level.

Source: REFINITIV, Analysis by Kalkine Group 

Risks associated with the investment:

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:

As per the management, demand for the light vehicle is likely to remain strong in 2022, which 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 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 Canadian Tire Corporation Ltd, Martinrea International Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of MRE at the closing price of CAD 10.18 on February 15, 2022.

One-Year Technical Price Chart (as on February 15, 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. 

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.