BRP Inc.

BRP Inc. (TSX: DOO) designs, develops, manufactures, distributes, and markets snowmobiles, all-terrain vehicles, and personal watercraft under the Ski-Doo, Sea-Doo, Can-Am, and Lynx brand names. 

Key Updates:

• Solid Growth in Free Cash Flows: The company reported robust growth in free cash flows in FY21, which stood at CAD 674.3 million, significantly higher than CAD 224.8 million a year ago. Meanwhile, the company reported higher cash from operations at CAD 954.2 million in FY21, as compared to CAD 555.5 million in FY20.
• Impressive growth from Year-Round Products: The ‘Year-Round Products’ contributes the highest revenues among the segments, while the company witnessed a solid 8% y-o-y growth in Q4FY21. The increase was supported by robust growth from the North American Side-by-Side Vehicles (SSV) segment. Moreover, the growth in volumes was supported by improved demand from All-Terrain Vehicles (ATV) and Three-Wheeled Vehicles (3WV) segments also.                                     

(Source: Company Presentation)

• Capacity Addition to cater to growing demand: As per the recent trend, the vehicle industry is witnessing significant growth from the powersports segment. Hence, to meet the additional demand, the group made an additional SSV manufacturing facility in Mexico, which is supposed to be operational from H2FY22 and is expected to add ~50% of SSV production capacity. Notably, the group has industry-leading line-ups across the portfolio and is well-poised to take advantage of the growing demand from the segment.

FY21 Financial Highlights:

• DOO announced its full-year result, wherein the company posted revenues of CAD 5,952.9 million, slightly lower than CAD 6,052.7 million in FY20. The tepid performance was primarily attributable to a lower sales volume due to the temporary suspension of production during part of the first half FY21.
• Total operating expenses stood higher at CAD 1,006.7 million, from CAD 849.7 million in FY20. The group reported a lower selling and marketing expense at CAD 332.5 million, v/s CAD 382.5 million in FY20. Moreover, a slide in general and administrative expense (CAD 230.5 million v/s CAD 256.9 million in FY19) is positive for the group. However, marginally higher research and development costs (CAD 242.3 million v/s CAD 238.4 million in pcp) along with an inclusion of impairment charge amounting to CAD 177.1 million remained a drag. Operating income slide to CAD 465.6 million from CAD 604.3 million in FY20.
• Net income stood at CAD 362.9 million v/s CAD 370.6 million in FY20, partially offset by a higher financing cost (CAD 120 million v/s CAD 90.9 million in FY20).
• At the end of FY21, the group reported a significant rise in a cash balance at CAD 1,325.7 million, from CAD 42.5 million in FY20.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: A significant part of the revenue is being derived from seasonal products, and due to the cyclicality of the demand, the group might witness a slide in overall volumes.

Stock Recommendation:

Despite the current slowdown in the Automobile industry, the group was able to deliver solid operational performance in FY21, which is encouraging. The company has been able to identify the changing consumer trends and has successfully offered innovative offerings across the segment, which is a key positive and augurs well for the long-term prospects of the company. For FY21, the group is expecting a minimum 25% growth in the top line and at least a 22% jump in Normalized EBITDA over FY20. The stock of DOO already soared significantly in the last one year due to demand revival within the Automobile segment. The stock is trading close to the upper band of its 52-week trading range of CAD 24.43 and CAD 113.88, respectively. On the valuation front, the stock is trading at a forward EV to EBITDA multiple of 8.7x, which is in line with the industry (leisure products) median of 8.9x. Hence considering the aforesaid facts, we recommend a ‘Watch’ stance on the stock of DOO at the closing price of CAD 112.21 million on April 9, 2021 and advise investors to wait for a better entry point.

One-year Price Chart (as on April 9, 2021). Source: Refinitiv (Thomson Reuters)

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