Toromont Industries Ltd

Toromont Industries Ltd (TSX: TIH), is a Canadian industrial company operating in two business segments: Equipment Group and CIMCO. Equipment Group is the largest segment by revenue, includes a Caterpillar dealership and rental operation of construction equipment. CIMCO offers solutions for the design, engineering, fabrication, and installation of industrial and recreational refrigeration systems.

Key highlights

• Increase in Bookings and Backlogs:In Q3 2020, the company reported growth in the Bookings, which increased to CAD 410.7 million as against CAD 367 million in Q3 2019. The Backlogs also increased to CAD 472.1 million, compared to CAD 453.9 million in Q3 2019.

• Consistent Dividend Distribution: The company has a strong history of dividend payment, which establishes the fact that the company’s business is resilient and has reported stable cash flows over the years. The company announced a quarterly dividend of CAD 0.31 per common share, payable on January 5, 2021, to shareholders with a record date of December 9, 2020. 

Source: Company

• Robust financial position:The Company is maintaining a strong financial position. The ratio of net debt to total capitalization was 10% at the end of September 2020, compared to 15% in December 2019, and 22% in September 2019. Cash in hand was CAD 471 million on September 30, 2020. Along with this, the company also hold a consolidated undrawn revolving credit facility of CAD 750 million, to provide additional liquidity. 

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the company posted revenues of CAD 921.7 million, decreased by 5% as against CAD 975.2 million in Q3 2019, reflects continued lower economic activity imposed by COVID-19. While some recovery phased in during the quarter, revenues were still below pre-pandemic levels. Product support and rental revenues were lower by 3% and 11% respectively. Equipment sales were lower by 6%, reflecting lower new equipment sales across markets.

Source: Company

• Operating income reported by the company was CAD 112.8 million in Q3 2020, as against CAD 114.4 million, mainly due to lower revenues, primarily offset by lower expenses. 
• The company reported net earnings of CAD 77.3 million in Q3 2020, as against CAD 79.6 million in Q3 2019.

Risk associated with investment

The pandemic had a significant impact on the company. Since March 2020, the government imposed several restrictions and special preventive measures, including the suspension of business activities deemed non-essential. This crisis reduced operations in many fields which led to a substantial slowdown in both group’s segments. Many restrictions played a direct role to drag down the company’s financial performance. Continuation of such a trend would affect the overall performance.

Valuation Methodology (Illustrative): Price to Cash Flow

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The pandemic had a significant impact on the company. Since the government has gradually announced the stages of its reopening plan, we believe that the worst of the COVID‐19 pandemic is behind us. We think that the company will gradually return to more normal revenue from the outperformance of both segments of the group in the upcoming time as the economy has started recovering slowly. Therefore, based on the above rationale and valuation, we have given a “Hold” rating at the closing price of CAD 88.63 on December 1, 2020. We have considered Aecon Group Inc, SNC-Lavalin Group Inc, Finning International Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

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