Westport Fuel Systems Inc. (TSX: WPRT) provides high-performance, low-emission engine and fuel system technologies utilizing gaseous fuels. The company operates through four segments, namely, Original Equipment Manufacturer (OEM), Independent Aftermarket (IAM), the Cummins Westport Inc (CWI) Joint Venture, and Corporate.

Key Updates:

• Bullish Macros: The automotive industry is shifting towards more climate-friendly vehicles which is resulting to an increase traction for the low-emission engine and fuel system technologies using gaseous fuels. Moreover, on account of the growing demand for freight transportation segment, the medium- and heavy-duty trucks has also increased globally. These factors have contributed to the overall growth of company’s product HPDI 2.0 fuel systems during Q4FY21. We expect the momentum to sustain and would lead to higher sales volumes in the coming quarters.

• Prudent Capital Management: At the end of FY21, the company reported its D/E ratio of 0.34x, in Q4FY21, as compared to the industry median of 0.42x. This indicates a higher financial flexibility and prudent capital management. Moreover, the company posted its long-term debt to capital of 15.8% in Q4FY21, which is lower than the industry median of 22.5%. A lower ratio indicates lower balance sheet risk, which is a key positive.

• Improved liquidity: The company reported its quick ratio and current ratio of 1.74x and 2.31x, respectively, in Q4FY21, higher than the industry median of 1.31x and 2.11x, respectively. The above indicates better working capital management and illustrates that the company is able to fund its short-term liability through its current assets.
  

Risks Associated with the Investment:

The company derives a part of its revenue from Russia as it caters to several OEM and IAM players who have presence across Russia. Hence, the performance of the company might be hindered due to the ongoing conflict between Ukraine and Russia. 

   FY21 Financial Highlights:

     FY21 Income Statement Highlights (Source: Company Report)

• WPRT announces its full-year result, wherein the company posted its revenue of USD 312.4 million, significantly higher than USD 252.4 million in FY20. The growth was supported by higher income from both original equipment manufacturer (OEM) and Independent Aftermarket (IAM) segments.
• The company witnessed a higher cost of sales, increase in research & development, higher general & administrative costs, and a surge in sales & marketing expense. Hence loss from operations stood higher at USD 30.5 million from USD 21.9 million in FY20.
• The company reported its net income of USD 13.6 million in FY21, as compared to USD a net loss of USD 7.3 million in pcp due to higher income from investment accounted by the equity method.
  

Valuation Methodology (Illustrative): EV to Sales based

Stock Recommendation:

Due to the change in the overall market dynamics along with continued adoption of alternative fuel systems and components for transportation applications, the industry is witnessing higher demand for low-emission engine and fuel systems. Hence, the opportunity for the low-emission engine and fuel system remains huge in the coming years and we believe, the company is highly poised to take advantage of the above opportunity arising from the sector.

We have valued the stock using the EV to Sales based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered peers like NFI Group Inc, Capstone Green Energy Corp and Nikola Corp. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the last closing price of CAD 1.80 on April 12, 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 12, 2021). Analysis by Kalkine Group

Technical Analysis Summary

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