Celestica Inc. 

Celestica Inc. (TSX: CLS) is a US-based electronic manufacturing service (EMS) company that offers a variety of services starting from design, engineering, and assembly to testing and reverse logistics.

Key Updates:

• Constant Reduction in total debt: The company showcased prudent capital management and has constantly lowered its total borrowings during the last few quarters. A decline in total debt is a key positive, as it enhances the financial flexibility of the firm.

• Partnership with ECM: Recently, the company announced its collaboration with ECM, a software and technology firm, wherein the group would use ECM’s patented Printed Circuit Board (PCB) stator solution for the Aerospace and Defense (A&D) market. The above is expected to help the customers to access innovative new technology that reduces product weight, size, sound within a broad range of military-based applications.
  

• Promising acquisition: Recently, the company reported its acquisition of PCI Limited at a price consideration of USD 306 million from Platinum Equity. PCI limited is provides fully integrated design, engineering and manufacturing solutions and has five manufacturing and design facilities across Asia. As per the management, the above acquisition is expected to add USD 325 million of annual revenue in FY21, coupled with low double-digit adjusted EBITDA margins and strong cash flows.

Q2FY21 Financial Highlights:

• CLS announced its quarterly result, wherein the company posted revenue of USD 1,492.4 million, lower than USD 1,420.3 million in Q2FY20. The growth was primarily attributable higher income from Connectivity & Cloud Solutions (CCS).
• Gross profit stood at USD 108.6 million, as compared to USD 118 million in Q2FY20, thanks to the higher revenue, partially offset by higher cost of sales (USD 1383.8 million versus USD 1302.3 million in Q2FY20).
• The quarter was marked by slightly lower Selling, general and administrative expenses and a slide in Research and development costs, partially offset by an increase in other charges.
• Net earnings stood at USD 13.3 million, lower than USD 26.3 million, a year ago.

Q2FY21 Income Statement highlights (Source: Company Report)

Risks: Despite a growth in the top-line the company is battling with higher input costs, and the continuation of the above trend might dampen the company’s margins and cash flows.

Valuation Methodology (Illustrative): Price to CF-based

Stock Recommendation:

The company reported a growth in its cash flows and reported its cash flow of USD 147.9 million in H1FY21, as compared to the USD 105.3 million in pcp. Moreover, the recent acquisition of PCI limited is expected to boost the company’s clientele with more than 20 blue-chip customers, which is a key positive. We have valued the stock using the Price to Cash flow based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Sanmina Corp, Flex Ltd etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of CLS at the closing market price of CAD 11.67 on October 25, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. 

Technical Analysis Summary:

One-Year Technical Price Chart (as on October 25, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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