NFI Group Inc.

NFI Group Inc. (TSX: NFI) is a Canadian automobile manufacturer. The company operates via two segments: manufacturing operations and aftermarket operations. Manufacturing operations, which represents more than half of the company's revenue, includes the manufacture of transit buses for public transportation, and motor coaches. Aftermarket operations include spare parts and servicing related to transit buses and motor coaches.

Key Highlights:

• On September 09, 2020, the group informed that it would be the first to include antimicrobial sidewall paneling from Polser USA for the interiors of its buses. With downtime for sanitation as a significant concern for transit bus organizations, this safety upgrade brings a new highly effective, no-maintenance feature to customers
• The group recently announced that it had delivered 16 new MCI J4500 coaches to the Government of Canada's Department of National Defense with an option to deliver an additional 12 coaches by 2022.

Q2FY20 Financial Highlights: NFI announced its quarterly results, wherein the company posted revenue of USD 333.334 million, significantly lower than USD 683.353 million in the previous corresponding period (pcp). The decline was primarily attributed to a 57.4% decline in manufacturing revenue due to temporary idling of production facilities due to COVID-19 coupled with a 15.5% y-o-y decline in the aftermarket revenue. The decrease in the aftermarket revenue was due to lower volumes due to reduced transit services activity on account of COVID-19. Gross loss stood at USD 17.379 million, against a gross profit of USD 98.785 million in Q2FY19, due to lower revenue. Loss from operations stood at USD 72.001 million, as compared to a profit of USD 37 million in the previous corresponding period (pcp), due to a gross loss and foreign exchange loss, partially offset by a lower sale, general and administration costs. The company reported a net loss of USD 74.05 million, as compared to a net profit of USD 8.507 million in Q2FY19, due to higher interest on long-term debt, partially offset by a significantly lower fair market value loss on interest rate swap.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: COVID-19 has affected the group’s operations and performance. Due to the pandemic, the group’s manufacturing operations were closed temporarily. Though, the group has resumed manufacturing operations, further break out of the novel virus would result in shut down of facilities, which would affect the overall performance.

Valuation Methodology: EV/Sales Based (Illustrative)

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

Stock Recommendation: After idling facilities for the majority of the second quarter, the Company restarted all manufacturing facilities in mid-May through June. While operations have resumed production, levels are not yet at pre-COVID levels. With some Public customer orders having been deferred or delayed, manufacturing resumed at lower levels. Private segment production at both MCI and ADL are not expected to reach pre-COVID-19 levels until at least 2021. The group's backlog position stood at 10,004 EUs (4,400 EUs Firm and 5,604 options) valued at USD 4.9 billion. The Company launched "NFI Forward," a group-wide transformational initiative expected to generate more than USD 75 million in annualized cost savings by the end of 2022. Despite the challenging operating environment, the group declared dividends of CAD 13.3 million in the quarter. Based on the Company's contractually obligated vehicle sales, updated production schedule expected private market deliveries and anticipated aftermarket sales; the management expects Adjusted EBITDA of USD 145 million to USD 155 million for Fiscal 2020, which would represent USD 113 million to USD 123 million during the second half of 2020. We have valued the stock using EV/Sales based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered peers like Bombardier Inc, Linamar Corp and TFI International Inc etc. Considering the aforesaid facts, we recommend a 'Speculative Buy' stance in the stock at the closing market price of CAD 17.40 on September 11, 2020.

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

Disclaimer

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