Lower Business Activities lead to Cost-cutting Strategies: Mullen Group Ltd. (TSX: MTL) is a Canada based Logistics Company that owns a network of independently operated businesses.  The company is leading suppliers of trucking and logistics services which includes less-than-truckload, truckload, warehousing, logistics, oversized and specialized hauling transportation. A part of the operation is related to specialized equipment and services provided to energy and utility industry.

In response to the COVID 19 crisis, MTL decided to temporary reduce its workforce. Further, MTL suspended its monthly dividends. The company expects capex to be CAD 50 million in FY20. The company announced to hold annual shareholders meeting on May 04, 2020.

Q2FY20 Financial Highlights: On April 22, MTL came up with its quarterly results, wherein the company reported its revenue of CAD 318.2 million, reflecting a marginal decline of 0.4% on a y-o-y basis. The quarter was marked decent growth in less-than-truckload and specialized & Industrial services while logistics & warehousing marked a 5.5% decline in revenues due to mandatory closure of operations across several parts on account of COVID 19. Operating income before depreciation and amortization was up 2.7% on y-o-y to CAD 45.2 million. The increase was due to improved operating income from Logistics & warehouse segment and Specialized & Industrial Services segments while decline in Less-than-truckload segment remained a drag. Net cash from the operating activities during Q1FY20 soared 66.1% on y-o-y basis to CAD 40.2 million. Net income remained under pressure and decreased to CAD 4.7 million, from CAD 11.6 in Q1FY19. The decline was due to the combined effect of negative variance in foreign exchange and in the fair value of investments, rise in finance costs, coupled with higher amortization expenses.

Q1FY20 Financial Highlights (Source: Company Reports)

Stock Recommendation: The stock price corrected ~60% in the last one year and currently trading above its 20 Days Simple Moving Average of CAD 4.48. The stock is trading near to the lower band of its 52-weeks trading range of CAD 12.26 and CAD 3.85. Demand destruction across sectors is likely to impact the company’s business in the near-term. The company is focusing on retaining its short-term liquidity due to lower business activities across its segments and initiated several cost-cutting strategies. Falling crude oil prices further results in a declining activity within the oil and gas transportation segment. However, the company’s business remains steady and has strong cash position. Further, the company’s business is diversified to many sectors of the economy which should provide some cushion. Also, the steep decline in the company’s stock price and any recovery in the economy are likely to boost its stock higher. The stock is currently trading at a forward EV/EBITDA multiple of ~5.7x against the industry average of ~7.5x. Hence, we recommend a ‘Speculative Buy’ on the stock at the closing market price of CAD 4.75 as on April 22, 2020.

MTL Daily Price Chart (Source: Thomson Reuters)

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