Finning International Inc.

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

Key Highlights:

• Decline in Debt Burden: During Q1FY21, the company reported its total debt at CAD 1,685 million, as compared to CAD 2,206 million at the end of Q1FY20, reflecting an 25.6% decline. Moreover, the D/E ratio remains healthy at 0.75, which improved from 1.01 in Q1FY20. Debt to Equity, lower than one, indicates a healthy balance sheet. Moreover, lower total debt indicates a lower finance costs, which would further support the company’s profitability.

• Revival in the Demand: The company witnessed an improved demand for its products during Q2FY21 and expected it to sustain for the rest of FY21. Notably, consolidated product support revenue is expected to grow between 5% to 9% in FY21. The prime growth drivers being market share gains within the construction space, increased copper production in Chile backed by growing demand across the globe. Moreover, stability across the oil sands and associated rebuilds, coupled with growth within the digital performance solutions, are also the key drivers for the company’s growth. 

Q1FY21 Financial Highlights:

• FTT declared its first quarterly result, wherein the group reported total revenue of CAD 1,596 million, marginally higher than CAD 1,558 million in the previous corresponding period (pcp). The increase was driven by strong growth from the new equipment and used equipment segment, partially offset by a slide in income from product support (CAD 887 million v/s CAD 934 million in pcp).
• Gross profit slide marginally to CAD 407 million, from CAD 418 million in pcp, due to a higher cost of sales (CAD 1,189 million v/s CAD 1,140 million in pcp).
• Earnings before finance costs and income taxes stood at CAD 108 million, increased from CAD 94 million in Q1FY20. The growth was supported by a decline in the selling general and administrative expenses (CAD 314 million v/s CAD 325 million in pcp) coupled with the inclusion of other income amounting to CAD 15 million.
• Net income stood at CAD 70 million, grew from CAD 54 million in pcp, supported by lightly lower finance costs coupled with elevated earnings before finance costs and income taxes.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risk: Due to the extended restrictions and lockdown measures, the company’s performance might be impacted due to sluggish demand across the heavy machinery and vehicles segment, which would subsequently take a toll on the overall performance of the company.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company is focusing on reducing costs by driving workforce and facility productivity and optimizing the supply chain processes. The company already achieved ~CAD 100 million of cost, which was set in 2020, and is planning to reduce by another CAD 50 million, which is encouraging and would boost the company’s earnings. We have valued the stock using the price to cash flow based relative valuation method and have arrived at a single-digit upside (in percentage terms) upside. For the said purposes, we have considered peers like Terex Corp, Wajax Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of NFI at the last closing price of CAD 32.29 on July 07, 2021.

One-Year Technical Price Chart (as on July 07, 2021). Source: Refinitiv, Analysis by Kalkine Group

The North West Company Inc.

The North West Company Inc. (TSX: NWC) is a leading Canadian retailer which provides food and everyday products and has a significant presence across the rural and urban communities in Canada, Alaska, the South Pacific and the Caribbean. 

Key Highlights:

• Surge in Dividend Payment: The company reported a higher dividend payment in Q1FY22 at CAD 454 million, as compared to CAD 16.088 million in the previous corresponding period. Moreover, the stock of NWC carries a dividend yield of ~4.0%, which is decent considering the current interest rate scenario.

• Steep Reduction in total debt: The company reported a steep decline in its total debt to CAD 282.629 million in Q1FY22, as compared to CAD 405.509 million in Q1FY21, reflecting a reduction of ~30% on y-o-y basis. Moreover, the group reported a lower D/E ratio of 0.54 in Q1FY22, improved significantly from 0.94 in Q1FY21.

Financial Highlights for three months ended April 30, 2021:

• NWC announced its quarterly result, wherein the group reported its sales of CAD 550.988 million, v/s CAD 592.569 million in the previous year. The decline was primarily attributable to a lower income from the food segment from both Canada and international segments.
• Gross profit stood slightly lower at CAD 182.572 million, v/s CAD 184.156 million in pcp, due to lower sales, while a lower cost of sales (CAD 368.416 million v/s CAD 408.413 million in the previous year) supported the performance.
• Earnings from operations soared to CAD 56.312 million, from CAD 19.471 million in the previous period. The increase was supported by significantly lower selling, operating and administrative costs (CAD 126.260 million v/s CAD 164.685 million in the previous year).
• Net earnings were recorded at CAD 40.288 million, increased from CAD 12.254 million a year ago.

     Income Statement Highlights (Source: Company Report)

Risks: A change in consumer preference for the company’s products would lead to a lower sales volume and subsequently dampen the company’s performance.

Valuation Methodology (Illustrative): Price to Earnings  

Stock Recommendation:

For the second quarter of FY22, the company is expecting a demand revival, which would lead to a decent volume growth over the previous corresponding period depending on the current vaccination program conducted by the Canadian Government. However, the long-term outlook of the company remains bright, supported by favorable product pricing and improved cost center and capital management programs conducted by the group. Notably, in Q1FY22, the group generated gross margin and EBITDA margin of 33.1% and 13%, respectively, higher than the industry median of 22.3% and 5.3%, respectively. The group also reported its net margin of 7.3% in Q1FY22, way higher than the industry median of 1.9%. We have valued the stock using the price to earnings-based relative valuation method and have arrived at a single-digit upside (in percentage terms). Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 35.77 on July 07, 2021.

One-Year Technical Price Chart (as on July 07, 2021). Source: REFINITIV, Analysis by Kalkine Group

GDI Integrated Facility Services Inc

GDI Integrated Facility Services Inc (TSX: GDI) is engaged in providing commercial facility services. Janitorial services, technical services, and complementary services are among the company's operating segments. Janitorial services include washing and dusting desks and tables, vacuuming carpets, cleaning floors, sterilizing kitchens and washrooms, and other daily or weekly business cleaning services. Technical services segment provides building system controls, repairs and services across Canada and the United States.

Key highlights

• Acquired BPAC Group, Inc: Recently, the company’s U.S subsidiary, Ainsworth Inc., acquired the BPAC Group, Inc., one of the largest and most respected mechanical services providers in New York State, providing both retrofit and renovation services and a strong service call platform principally to the commercial sector, which generated approximately USD 110 million in annual revenue in its most recent fiscal year. In addition to strengthening Ainsworth's existing U.S. operations, BP positions Ainsworth to expand its footprint into new markets in the United States both organically and through acquisition.

• Cleaning and disinfection would become a healthy practice: We feel that this disinfection and cleaning service would not be limited until this Covid 19 pandemic spread. The clients would start taking this service regularly, and many more would fall in this category, it will boost the business of the company as they are the most prominent player having all the technical know-how and expertise of this segment.

• Increase in cash from operations: In Q1 2021, cash flow from operating activities reached CAD 52.8 million compared to CAD 20.2 million in Q1 2020, an increase of CAD 32.6 million. This increase was mainly due to higher operating income of CAD 18.7 million and the effect of the reduction of non-cash operating assets and liabilities of CAD 26.8 million.

Source: Company

• Reduction in Debt: From the past few quarters, the company is consistently reducing its total debt, which is a key positive and indicates higher financial flexibility. Notably, total debt stood at CAD 189.6 million in Q1FY21, significantly lower than CAD 264.4 million in Q1FY20. A lower debt is a healthy sign, and it reduces interest expense as well. Although on Y-o-Y basis the debt decreased but as compared on sequential basis, the debt increased by CAD 20.8 million mainly due to the acquisitions made by the group in 2021.

   Financial overview of Q1 2021

Source: Company

• In Q1 2021, the company reported revenue of CAD 383.6 million, higher than CAD 354.8 million in Q1FY20. The increase was driven by the positive impact of acquisitions coupled with the depreciation of the U.S dollar relative to the Canadian dollar.
• Operating income were reported at CAD 27.2 million, surged from CAD 8.5 million in pcp, supported by higher revenue, while a higher cost of services (CAD 295.4 million v/s CAD 288.9 million in pcp), and increase in selling and administrative expenses (CAD 56.1 million v/s CAD 47.2 million in pcp) remained a drag.
• Net income grew to CAD 13.0 million, from CAD 4.3 million in pcp, supported by higher operating income, while a higher net finance expense (CAD 8.8 million v/s CAD 0.7 million in pcp), coupled with a higher Income tax expense (CAD 5.3 million v/s CAD 3.4 million in pcp) remained a drag.

Risks associated with investment

Due to any unprecedented market challenges on account of extended Government restrictions, the operations might get impacted. The group reported an increase in its input costs like Cost of services, Selling and administrative expenses etc., the continuation of the above trend is likely to dampen the company’s profitability and margins.

Stock recommendation

We anticipate that the company's Janitorial business divisions would continue to do well as long as COVID-19 is a threat to our society, as clients seek to them for expertise and improved assistance to keep their facilities secure. As facilities reopen, we anticipate increased market demand for enhanced air quality, and as Canada's biggest HVAC services supplier and non-OEM building automation systems integrator, the company is well positioned to capitalize on this need. Furthermore, BPAC’s acquisition positions the group to expand its footprint into new markets in the United States both organically and through acquisition. On the valuation front, the stock is available at an EV to Sales multiple of 0.8x on an NTM basis, as compared to the industry (Professional & Commercial Services) median of 2.2x. Hence, considering the above facts, we suggest a ‘Hold’ recommendation on the stock at the closing price of CAD 55.51 on July 07, 2021.

One-Year Technical Price Chart (as on July 07, 2021). Source: REFINITIV, Analysis by Kalkine Group

*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.