Exchange Income Corporation

Exchange Income Corporation (TSX: EIF) is a diversified, acquisition-oriented corporation focused on opportunities in aerospace and aviation services and equipment, and manufacturing activities. The company operates through two major segments, namely, Aerospace & Aviation and Manufacturing.

The company announced a monthly dividend of CAD 0.19 per share, payable on October 15, 2020.

Q2FY20 Financial Highlights: Exchange Income announced its second quarterly results, wherein the group posted revenue of CAD 243.7 million, reflecting a decline of ~25% on y-o-y basis. The decline was majorly attributable to the challenging scenario of the Aerospace segment across the Globe, which was partially offset by an improved performance from the manufacturing segment. Revenue from the manufacturing segment grew 19% on y-o-y basis, driven by the positive impact from the acquisitions of AWI and L.V. Control in FY19.  EIF reported EBITDA of CAD 62.075 million, depicting a fall of 29% y-o-y, primarily due to a decline in the passenger volume in the recent past on account of travel restriction. Net earnings of the Company stood lower at CAD 5.645 million, reflecting ~88% decline from Q2FY19. Free cash flow stood at CAD 42.3 million compared to CAD 65.7 million in the previous corresponding period (pcp). The company reported capital expenditure of CAD 25.412 million during the second quarter of FY20.

Q2FY19 Financial Highlights (Source: Company Reports)

Risks: A major part of the revenue is being derived from the aviation segment, and the recent restrictions imposed on account of the pandemic has caused a tremendous impact on the aviation segment. Continued pain in the aviation sector might hinder the group’s performance.

Valuation Methodology: EV to Sales Based (Illustrative)

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

Stock Recommendation: The EIF stock corrected ~29% so far this year, due to the travel restriction on account of COVID 19 pandemic. The aviation and aerospace segment reported a higher passenger growth during the latter part of the second quarter and improved to 40% to 50% levels, from the 10% to 15% levels during the latter half of March 2020, which is encouraging. The company further expect the above capacity levels to improve in the coming days, as several Governments eases lockdown restrictions. Despite a major slowdown across the global economy, the company’s manufacturing segment has performed well in the recent past, which is a key positive. Going forward, the company will remain focus on the work in progress and on proper execution of the business strategies and plans in order to drive performance. The company acquired Window Installation Specialists, Inc. and secured 10-year Netherlands Defence Contract, which ensures stable cash flows in the coming quarters. We expect the pressure on the profitability is expected to continue in the coming days on account of higher input costs. However, the increase in aviation capacity along with improved dynamics from the manufacturing segment is likely to drive the operating performance of the company in the coming quarters.  The EIF stock soared ~77% in the last six months, and at the last traded price, the stock was offering a lucrative dividend yield of ~7.2%, which is encouraging from an income investors point of view. We have valued the stock using the EV to sales based relative valuation approach and arrived at a target price, which suggests a double upside potential (in % terms). For the said purpose, we have considered peers Air Canada, Bombardier Inc. and CAE Inc etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 31.72 on September 22, 2020.

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

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