Celestica Inc

Celestica Inc. (TSX: CLS) offers innovative supply chain solutions to its customers across the globe. The Company has two operating segments, namely, Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). ATS segment consists of ATS end market and is comprised of the aerospace and defense (A&D), industrial, energy, etc. while CE business includes semiconductor, display, and power & signal distribution equipment businesses.

Q2FY20 Financial Highlight: CLS announced its quarterly results, wherein the Company reported revenue of USD 1,492.4 million, reflecting an increment of 3% on y-o-y basis. The quarter was marked by strong momentum from CCS segment, while a lower income from the ATS segment remained a drag. The group witnessed soft demand in commercial aerospace and industrial businesses on account of COVID 19 pandemic. Gross profit improved to USD 108.6 million against USD 97.8 million in the previous corresponding period (pcp), thanks to a higher income. Earnings from operations came in higher at USD 30.1 million as compared to USD 11.6 million in pcp, primarily attributable to a higher gross profit and lower expenses. Selling, general & administrative expenses and Research & development costs stood lower than the previous corresponding quarter. Amortization of intangible assets stood at USD 6.6 million as compared to USD 7.8 million in pcp. The Company reported a lower finance cost of USD 8.9 million against USD 12.6 million in pcp, which cushioned the bottom-line. Net earnings stood at USD 13. 3 million as compared to a net loss of USD 6.1 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: During 1H20, two clients had contributed more than 10% each to the group’s revenue. Loss of such clients might affect the top-line drastically. The order book from A&D, industrial and display businesses is likely to remain low in the near term, which would be a drag.

Valuation Methodology: Price/Earnings Based (Illustrative)

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

Stock Recommendation: The company reported a decent result amid the challenging time. Demand from the semiconductor CE customers was higher, as compared to the previous corresponding quarter and CLS expects the momentum to continue in the second quarter as well. Due to a soft order book, the company has delayed its previously announced capacity expansion programs. Connectivity & Cloud Solutions (CCS) segment showed enough resilience in the recent past and constituted a major part of the revenue. The segment showed margin expansion and enhanced the profitability of the business. However, adverse conditions in the commercial aerospace market continued to negatively impact A&D business, and the trend is likely to continue in net few quarters owing to COVID-19 pandemic. The company repaid CAD 61 million of outstanding term loan borrowings during the quarter, which would provide flexibility to the balance sheet. The stock soared ~27% and ~19% in the last one month and three months, respectively. We have valued the stock using the P/E based relative valuation approach and arrived at a target price, which suggests a double-digit upside side potential (in % terms). For the said purpose, we have considered Flex Ltd, Jabil Inc, and Sanmina Corp as a peer group for comparison purpose. The group has reported a decent quarterly result, and the proportion of higher-margin business is likely to increase going forward. However, client concentration (two clients contributed more than 10% each to 1HFY20 revenue) poses a risk. Hence, considering the aforesaid facts, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 11.06 on July 31, 2020.

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

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