Finning International Inc.

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

Key Highlights:

• Higher Financial Flexibility: The group reported strong growth in its free cash flows in 9MFY20 to CAD 578 million, significantly higher than the previous financial years, driven by stable organic growth and strong inventory management, which subsequently led to lower inventory spending. Moreover, the group reported net debt to EBITDA at 1.7x in Q3FY20, significantly lower than 2.5x in Q3FY19. A lower net debt to EBITDA indicates higher financial flexibility as the organization would easily pay-off its debt components. Notably, long-term debt has been reduced to CAD 1,136 million in Q3FY20, from CAD 1,318 million in FY19.                          

Source: Company Reports

• Organic Growth through Advanced Digital and e-Commerce Capabilities: The group adopted new-generation digital and IT services, which has helped the company to identify opportunities from existing and new client base through the use of Machine Condition Monitoring and Integrated Procurement. Through the digital platform, the customers would be able to receive 24*7 support, which would help the company in direct shipping or book a service on behalf of the customer. We expect the above technology would support the company’s future operation through higher product-penetration.

Q3FY20 Financial Highlights:

• FTT declared its third-quarter results, wherein the company reported a 21% y-o-y decline in revenue to CAD 1,553 million. The decline was primarily attributed to a significantly lower income from New equipment segment and Product support segment.
• Gross profit slide to CAD 390 million, as compared to CAD 459 million inQ3FY19.
• The quarter was marked by a lower SG&A expense (CAD 290 million, versus CAD 333 million in Q3FY19). The corporation reported a 7% y-o-y growth in EBITDA at CAD 215 million, while EBITDA margin improved to 14.9% from 11.1% in pcp. The group reported lower spending during the quarter, driven by strong cost management coupled with CAD 40 million in government wage subsidies in Canada and the UK & Ireland.
• The company reported its net income at CAD 88 million, higher than CAD 76 million in Q3FY19.
• The group reported a cash and cash equivalent of CAD 453 million, while total assets stood at CAD 5,535 million.                 

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: The group’s performance might be affected due to tepid demand across the heavy machinery and vehicles segment, which might take a toll on the overall performance.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

The management expects gradual recovery, as key commodity prices have recovered to constructive levels in the recent past, which is a key positive. The group further expects significant traction within the mining and infrastructure space, which would continue to uphold FY21 revenue. Moreover, FTT is expected to save more than CAD 100 million through global cost initiative on an annualized basis, which augurs well to support the margins. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers Toromont Industries Ltd, Terex Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 28.53 on February 4, 2021.

FTT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

ATS Automation Tooling Systems Inc

ATS Automation Tooling Systems Inc. (TSX: ATS) is an automation solutions provider. The Company is engaged in planning, designing, building, commissioning and servicing automated manufacturing and assembly systems, including automation products.

Key highlights

• Growing higher-margin after-sales service business: The Company is working to increase after-sales service revenues contribution to overall revenues over time, which is expected to balance the capital expenditure cycle of the Company’s customers. The Company made improvement in generating revenues from the Company’s aftersales service business in the third fiscal quarter compared to the first half of the fiscal year. 

• Rising Order Backlog: The Company’s Order Backlog includes several large enterprise programs with a long gestation period, therefore longer revenue recognition cycles. The company recently reported a backlog of CAD 985 million, higher than CAD 939 million in Q3 FY20. Higher-Order Bookings was primarily drive by the rise in order backlog in the life sciences and consumer products markets. Higher backlog indicates strong future revenues. In the third quarter of fiscal 2021, management expects to convert Order Backlog to revenues in the 35% to 40% range.

Source: Company

• Robust cash flow generation: In Q3 2021, cash flows provided by operating activities were CAD 78.9 million, against (CAD 7 million) in the previous corresponding period. The company got benefitted from lower working capital investment & higher profitability. On a YTD basis, the company generated healthy free cash flows of CAD 128 million.

Source: Company

• Healthy Liquidity: The Company expects that continued cash flows from operations, together with cash and cash equivalents on hand and credit available under operating and long-term credit facilities, would be sufficient to fund its requirements for investments in non-cash working capital and capital assets; and fund strategic investment plans including some potential acquisitions. The company holds CAD 224.5 million under its cash balance and CAD 750 million under its consolidated credit limit. 

Financial overview of Q3 2020

Source: Company

• In Q3 2021 the Company registered muted growth of 1% in revenue to CAD 369.7 million, against CAD 367.1 million in the previous corresponding period. The rise was primarily due to revenues clocked from acquired companies.
• On the back of lower cost of sales and lower restructuring expenses in Q3 2021, the Company’s increased to CAD 32.2 million, compared to CAD 10.3 million in Q3 2020.
• The Company posted Net Income of CAD 18.8 million in Q3 2021, as against CAD 4 million in the previous corresponding period, partially offset by higher income tax expense. 

Risks associated with investment

Due to the tepid economic scenario, the business might witness a reduction in the order book, which might lead to lower revenue. The existing macro challenges might lead to delay in the payment activities by the clients, which might act as a major setback to working capital management. 

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock recommendation

Over the long term, the Company expects to continue increasing its overall investment in non-cash working capital to support its business growth. The Company’s goal is to maintain its investment in non-cash working capital as a percentage of annualized revenues below 15%. The Company caters to a unique segment, and the demand for medical instruments is likely to remain robust. The Company managed to curtail its long-term debts by CAD 282 million and enjoy a healthy balance sheet. Therefore, based on the above rationale and valuation, we have given a “Hold” rating at the closing price of CAD 25.88 on February 4, 2021. We have considered AutoCanada Inc, Ritchie Bros. Auctioneers Inc, Toromont Industries Ltd, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

GDI Integrated Facility Services Inc.

GDI Integrated Facility Services Inc. (TSX: GDI) operates within the facility services sector, while the  company's operating segment includes Janitorial Canada, Janitorial USA, Technical services and Complementary Services.

Key Highlights:

• Acquisition of The BPAC Group, Inc.: On January 06, 2021, the group acquired The BPAC Group, Inc., a mechanical services provider in New York State, providing both retrofit and renovation services, with an annualized revenue of USD 110 million.

• Strong Technical Indicators: The stock of GDI closed above the long -term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish price trend. Notably, the stock appreciated ~37% and ~51%, respectively in the six three months and nine months, respectively.              

(Source: Refinitiv, Thomson Reuters)

• Impressive Sequential growth: The group reported improved performance during Q3FY20, as compared to Q2FY20. In Q3FY20, the group reported revenue of CAD 365.4 million, gross profit of CAD 82.2 million, respectively, higher than CAD 326.7 million and CAD 76.7 million, respectively in Q2FY20. Moreover, EBITDA margin stood higher at 7.9% in Q3FY20, compared to 6.4% in Q2FY20, supported by improved product mix. 

• Strong Performance from Complementary services: These services include the manufacturing and distribution of janitorial supplies and equipment and commands a higher margin. Due to the growing traction from the Personal Protective Equipment and cleaning and disinfecting products, the group saw a 17.5% growth from the segment in 9MFY20, which further supported the overall EBITDA margin.

Q3FY20 Financial Highlights:

• GDI announced its quarterly results, wherein the group posted revenue of CAD 365.358 million, higher than CAD 322.814 million in pcp. The increase was supported by the positive impact from recent acquisitions, while an organic decline of 1.1% on a y-o-y basis remained a drag.
• Operating income stood at CAD 24.415 million, significantly higher than CAD 9.878 million in pcp, supported by higher revenue and inclusion of support from Canadian Emergency Wage Subsidy amounting CAD 6.145 million. The group reported a higher cost of services (CAD 283.126 million versus CAD 264.356 million), increase in selling and administrative expenses (CAD 53.406 million versus CAD 39.782 million in pcp).
• Net income stood higher at CAD 13.187 million, from CAD 4.078 million in pcp, supported by higher operating income, partially offset by higher net finance expense (CAD 5.466 million versus CAD 4.266 million in pcp) and higher Income tax expense (CAD 5.762 million versus CAD 1.534 million in pcp)

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Technical Services segment provides building system controls, repairs and servicing and reported a 9.3% decline in 9MFY20 due to negative impact from COVID 19 restrictions. Continuation of the above trend would result in lower recurring revenues and would subsequently dampen the group’s income.

Valuation Methodology (Illustrative): Price to Equity based

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

Stock Recommendation:

Cash from operations stood higher at CAD 66.324 million in 9MFY20, as compared to CAD 41.428 million, a year ago. Meanwhile, the group reported a 28.2% y-o-y growth in the Adjusted EBITDA to CAD 72.8 in 9MFY20, which is a key positive. Moreover, the recent acquisition of The BPAC Group, Inc. would likely to support the company’s future operations. We have valued the stock using P/E based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Park Lawn Corp, Boyd Group Services Inc etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 43.27 on February 4, 2021.

GDI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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.