Shawcor Ltd

Shawcor Ltd. (TSX: SCL) is a Canada-based global material sciences company. The Company serves infrastructure, energy, and transportation markets. The Company operates through a network of fixed and mobile manufacturing and service facilities.

Why Should Investor’s Book Profit?

• Uncertainties hovering over crude oil prices: China, the No.2 oil consumer globally, has suspended some international flights and increases efforts to rein in a virus outbreak at Tianjin while the highly transmissible omicron variant has spread to the northeastern city of Dalian. Also, recently Beijing agreed with Washington in late 2021 to a release from strategic stockpiles near the Lunar New Year holidays starting February 1st. Also, omicron cases are increasing significantly across the globe. These factors together could dent oil prices rally in near term. A sharp plunge in oil prices will have adverse impact on SCL share price as well.
• Increasing cash conversion cycle days: The company’s cash cycle is relatively higher compared to industry median, in Q3FY21 SCL’s cash cycle (days) stood at 140.3 days, whereas industry median stood at 82.2 days, which implies that the company is taking relatively more time to convert its investments in inventory and other resources into cash flows from sales. Also, on a sequential quarter basis cash cycle has increased from 131.3 days reported in Q2FY21.
• Higher balance sheet risk: As of September 30, 2021, the company’s % LT debt to Total Capital ratio stood at 34.1% relatively higher compared to industry median of 19.3%. Also, debt protection metrices are relatively poor, with Net Debt/EBITDA ratio as of September 30, 2021 stood at 8.02x, compared to industry median of 7.05x. Given the penny cap market categorization of the company and a higher leverage position with lower debt protection metrices, indicates a greater balance sheet risk for the investors.
  

Stock recommendation

Given the resurgence in the omicron cases across the globe and increasing restrictions on travel and tour could disrupt recent oil price rally. Also, company is fundamentally not so strong given the higher balance sheet risk and bottom line losses reported in the Q3FY21. Hence, based on the above rationale, we recommend a “Sell” rating on “SCL” stock at the current market price of CAD 6.03 at 9:40 am Toronto time on 18 Jan 2022.

1-Year price chart (as on January 18, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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