Finning International Inc

Finning International Inc. (TSX: FTT), is a dealer and distributor of heavy-duty machinery and parts of the Caterpillar brand. The company sells and rents Caterpillar machinery to the mining, construction, petroleum, forestry, and power system application industries.

Why Investor’s Should Book Profit?

• Lower margin profile v/s Industry: In Q2 2021, the company failed on maintaining its pace and witnessed lower performance across operating margin matrix, which exhibits the pressure on company.
• Weak liquidity profile: In Q2 2021, the company's quick ratio was 0.91x compared to the industry median of 1.20x, while the current ratio stood at 1.76x against the industry median of 1.92x. These lower ratios against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.
• Long Cash Cycle days: The company is holding higher Cash Cycle (Days) compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 155.4 days compared to an industry median of 65.5 days.
• Exhausted technical indicators: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~73.10 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.
  

Valuation Methodology (Illustrative): Price to Earnings

Stock recommendation

In Q2 2021, the company posted strong results with a reduced cost base and more efficient operations and supply chain. However, the resurgence in delta variant cases, on the other hand, is creating a lot of uncertainty, and it might have an impact on the company's operations and cash flows. Furthermore, the company's liquidity ratios are on the lower side, and its cash cycle days are on the higher side compared to an industry median, indicating a weak liquidity profile. Moreover, the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 34.72 on October 18, 2021.

Enerflex Ltd.

Enerflex Ltd (TSX: EFX) engineers, designs, manufactures and provides aftermarket support for equipment, systems and turnkey facilities used to process and move natural gas from the wellhead to the pipeline. 

Why Investor’s Should Book Profit?

• Lower performance from the USA segment: Revenue for the USA segment was CAD 106 million, down by CAD 72 million in the same period in 2020. Engineered Systems revenue fell as a result of reduced opening backlog, while Service revenue fell as a result of lower activity levels and continuing margin pressure from increased competition and rising costs.
• Stretched Valuation: EFX shares are available at an NTM EV/EBITDA multiple of 6.3x compared to the industry (Energy) median of 5.9x. While on NTM P/E multiple it trades on 16.0x against the industry median of 9.1x. This implies that the shares are overvalued against the industry. The matrix below reflects that the company is overvalued against the industry on many multiples.

• Higher Cash Cycle days: The company is holding higher Cash Cycle (Days) compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 236.9 days compared to an industry median of 85.4 days.
• Higher average collection period: The company is having a higher average Accounts Receivable day of 117.1 days, against the industry median of 44.6 days. A higher average collection period indicates that the organization collects payments slower. This may create a difficulty for the company to have enough cash on hand to meet their financial obligations.
• Exhausted technical indicators: Recently, the stock witnessed a healthy rally on the daily price chart and price has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~85.30 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

Engineered Systems revenues were lower in the reported quarter, owing mostly to a lower entering backlog compared to the comparable Q2 2020 period. Decreased revenue was partly attributable to a negative foreign exchange effect from a weaker US dollar, as well as lower contributions from some major, high-margin Engineered Systems projects. Furthermore, the stock is trading at the stretched valuations on multiple fronts compared to the industry. The company is having higher cash cycle days and average collection period, which indicates that it is collecting payments at a slower pace. Even the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 10.85 on October 18, 2021.

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

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.