Celestica Inc.

Celestica Inc. (TSX: CLS) is a US-based electronic manufacturing service (EMS) company which offers a variety of services from design, engineering, and assembly to testing and reverse logistics. The company has two operating segments, namely, Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS).

Key Highlights:

• Solid Guidance: The company has guided for an impressive performance and expects Joint Design and Manufacturing segment top line to grow over 80% in FY20 to USD 800 million. Advanced Technology Solutions (ATS) segment revenue is likely to grow ~10% in 2021. The company expects its cash flow at more than USD 100 million in FY20, looks impressive as well. ATS segment margin is expected to be within its target range of 5% to 6% by the end of 2021. CCS segment margin is expected to be within its target range of 2% to 3% in 2021.
• Integrated Offerings: The company offers an innovative platform which has integrated solutions with cloud services, software integration and hardware support. The above integrated offerings help its client to deliver faster results at a lower cost structure, with adequate customization. Moreover, the group has its engineering team across China, Thailand and North America and has shipped more than 2.5 million units. We expect the above offerings would help the company for higher customer traction in the foreseeable future.

Source: Company Presentation

Q3FY20 Financial Highlights:

• CLS announced its quarterly results, wherein the company posted its revenue at USD 1,550.5 million, higher than USD 1,517.9 million in the previous corresponding period (pcp). The growth was aided by improved performance from CCS segment (USD 1,024.7 million versus USD 958.9 million in Q3FY19), partially offset by a lower income from ATS segment (USD 525 million, against USD 559 million in pcp).
• The company’s gross profit surged to USD 124.2 million, versus USD 97.7 million in the previous corresponding period (pcp), supported by higher revenue and stable cost of sales.
• Earnings before taxes stood strong at USD 40.3 million, as compared to USD 6.4 million in pcp, supported by higher earnings from operations combined with a lower finance cost (USD 8.9 million versus USD 12 million in Q3FY19).
• The company posted net earnings of USD 30.4 million, against a net loss of USD 6.9 million a year ago.
• Cash and cash equivalent stood at USD 451.4 million, while total assets were stood at USD 3,789.3 million.                    

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to the disengagement with Cisco Systems, Inc., FY21 performance of the company’s non-JDM Connectivity & Cloud Solutions segment is likely to remain lower than FY20, which might impact the overall performance of the company.

Valuation Methodology: Price to Earnings Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The company reaffirms a solid operational performance for FY20, backed up by strong R&D and innovations, and we expect further client addition as most of the businesses are leaning towards integrated IT support. Moreover, the company has reduced its overall debt-component, which is likely to result in lower finance costs which would further support the profitability. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a target upside of double-digit upside (in percentage terms). For the said purposes, we have considered peers like Flex Ltd, Jabil Inc etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 10.58 on December 4, 2020.

CLS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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