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:

• Improved backlog: At the end of Q2FY21, the company reported a backlog of CAD 1.4 billion, climbed from CAD 1.2 billion in Q1FY21. The growth was supported by new order intake from the mining segments across the Canada and South America geographies. The company reported a revival in construction activities, which drive the company’s volume.
• Bullish market outlook: The company expects higher mining activities are likely to persist on the backdrop of a strong outlook for copper, other base metals, and precious metals. Moreover, the group expects improved investments from public and private in the infrastructure sector, which would subsequently improve the order intake in the construction sectors. The company’s rental equipment segment is likely to stay positive as oil sand players are lowering new investments and preferring rental equipment over machine installations.
• Increase in Dividend payment: The company increased its quarterly dividend payment by 10% to CAD 0.90 per share. The company consistently increased its dividend distribution for the last twenty years, backed by stable cash flows. Notably, the stock carries a dividend yield of ~2.7%, which looks decent considering the current interest rate scenario.

Q2FY21 Financial Highlights:

• FTT declared its first quarterly result, wherein the group reported total revenue of CAD 1,845 million, grew from CAD 1,419 million in the previous corresponding period (pcp). The increase was driven by strong growth from the new equipment, used equipment segment, along with improved performance from the product support segment.
• Gross profit stood higher at CAD 449 million, from CAD 344 million in pcp, due to higher revenue, partially offset by higher cost of sales (CAD 1,396 million v/s CAD 1,075 million in pcp).
• Earnings before finance costs and income taxes stood at CAD 137 million, jumped from CAD 52 million in Q2FY20. The quarter witnessed a slightly higher selling general and administrative expenses (CAD 313 million v/s CAD 306 million in pcp).
• Net income stood at CAD 91 million, surged from CAD 18 million in pcp, supported by lower finance costs.

             Q2FY21 Income Statement Highlights (Source: Company Report)

Risk: Due to the extended restrictions and lockdown measures, the company’s performance might be impacted on account of 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 Earnings

Stock Recommendation:

The company showed margin improvement supported by strict cost structures and through improving deal execution and using data to drive inventory decisions and pricing management. Notably, EBITA in terms of net revenue jumped to 12.6% in Q2FY21, as compared to 8.8% in pcp. 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) upside. For the said purposes, we have considered peers like Terex Corp, Seven Group Holdings Ltd. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of FTT at the last closing price of CAD 32.79 on August 19, 2021.

One-Year Technical Price Chart (as on August 19, 2021). Source: REFINITIV, Analysis by Kalkine Group

Stella-Jones Inc.

Stella-Jones Inc. (TSX: SJ) produces and sells lumber and wood products. The company sells products in five main customer categories. The railway ties category, which generates most of the revenue sells pressure-treated lumber to the railway industry.

Key Highlights:

• Growing demand from residential lumber products: In the recent past, the company reported an impressive growth from its Residential lumber products, which primarily contributed to the company’s top-line growth. In H1FY21, the company posted Residential lumber sales of CAD 496 million, jumped from CAD 328 million in pcp, supported by elevated lumber prices.
• Positive Guidance in turbulent times: For FY21, the company expects sales growth in the low-to-high teens over FY20, supported by 15% to 20% y-o-y growth from residential lumber sales. On the other hand, utility poles sales are expected to grow in high-single-digit, as compared to FY20, while railway ties and industrial products sales are projected to increase in the low-single-digit range.
• Increase in dividend payment: The company reported an increase in the dividend payment in the recent past, backed by stable cash flows. The group reported the 17th consecutive year of dividend increase. Notably, dividend distribution in H1FY21 stood at CAD 24 million, as compared to CAD 20 million in pcp. From FY12 to FY21E, the company reported an 18.2% CAGR in its dividend distributions to CAD 0.72 per share, which is noteworthy.

Q2FY21 Financial Highlights:

• SJ announced its quarterly result, wherein the company posted Sales of CAD 903 million, as compared to CAD 768 million in the previous year. The increase was driven by growth in the company’s core product categories.
• Operating income soared to CAD 161 million, from CAD 101 million in pcp, supported by an improved revenue, while the higher cost of sales (CAD 742 million v/s CAD 667 million in Q2FY20) stood as a drag.
• EBITDA stood at CAD 180 million, as compared to CAD 120 million in pcp. EBITDA margin improved 440 bps to 20.0%.
• Net income for the period was recorded at CAD 115 million, jumped from CAD 69 million in the previous year.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s operations might be impacted due to lower commodity prices, currency volatility, high raw material costs, etc.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The company reported a higher EBITDA of CAD 279 million in H1FY21, as compared to CAD 183 million in pcp, while EBITDA margin stood higher at 18.3% in H1FY21, as compared to 14.4% in pcp. The company has a balanced revenue mix and is not dependent on a particular segment, which indicates a balanced risk profile. 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 Aecon Group Inc, IBI Group Inc etc. Considering the above-mentioned facts, we give a ‘Hold’ rating on the stock at the closing price of CAD 43.53 on August 19, 2021.

One-Year Technical Price Chart (as on August 19, 2021). Source: REFINITIV, Analysis by Kalkine Group

GDI Integrated Facility Services Inc.

GDI Integrated Facility Services Inc. (TSX: GDI) is engaged in the facility services sector and operates through segment includes Janitorial Canada, Janitorial USA, Technical services and Complementary Services.

Key Update:

• Decline in the debt-to-equity ratio: The company reported an improved D/E ratio in the recent quarters. At the end of Q2FY21, the company reported its D/E ratio at 0.48x, which is the lowest in the last five quarters. A lower D/E ratio is healthy, as it leads to higher financial flexibility and result to lower interest expenses. Moreover, total debt to long-term capital stood at 28.8% in Q2FY21, significantly lower than 36.9% in pcp.
• Revival in operations led to improved financials: The company reported ramping-up of activity levels in Technical Services Segment, which is a key positive as it led to a 9.6% organic growth in the first half of FY21. Notably, in H1FY21, the company reported top-line growth of 10.9% on y-o-y basis to CAD 755.8 million. Moreover, the company also reported a higher adjusted EBITDA margin of 8.8% in H1FY21, as compared to 6.2% in pcp. Further, the company reported a higher cash flow from operations of CAD 64.839 million compared to CAD 35.712 million in pcp.

Q2FY21 Financial Highlights:

• GDI announced its quarterly results, wherein the company reported revenue of CAD 190 million, higher than CAD 326.732 million in Q2FY20. 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 incomes were reported at CAD 014 million, slide from CAD 29.792 million in pcp. The decline was primarily due to higher cost of services (CAD 289.247 million v/s CAD 250.021 million in pcp), partially offset by lower selling and administrative expenses (CAD 51.856 million v/s CAD 55.870 million in pcp) and a significantly lower transaction, reorganization and other costs (CAD 0.317 million v/s CAD 2.469 million in pcp).
• Net income grew to CAD 959 million, from CAD 13.485 million in pcp, supported by lower net finance expense (CAD 3.527 million v/s CAD 10.118 million in pcp), while a higher Income tax expense (CAD 6.528 million v/s CAD 6.189 million in pcp) remained a drag.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: 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., while the continuation of the above trend is likely to dampen the company’s profitability and margins.

Valuation Methodology (Illustrative): Price to Earnings

The company reported stable performance despite the ongoing pandemic, which indicates a resilient business model. The company provides cleaning and disinfection, decontamination services for corporates, which is gaining traction in current scenario, and is expected to remain in demand in the long-term. 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) upside. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 55.37 on August 19, 2021.

One-Year Technical Price Chart (as on August 19, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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