Linamar Corp

Linamar Corp (TSX: LNR) is a Canada-based manufacturing company that makes powertrains and drivelines for vehicle and power generation markets and operates under two business segments: Transportation and Industrial. The group generates most of its revenue from the Transportation segment.

Key Highlights 

• Recovery in global light vehicle markets: The market dynamic for the light vehicles is portraying a positive change, which is crucial for the company. China sales were up by 9% compared on a yearly basis, in October as the vehicle demand continues to be supported by incentives from 15 cities/provinces. US sales were also up by 1%, registering the highest monthly sales volume of 1.35 million since the beginning of the pandemic.

Source: Company 

• Healthy cash flows: On the back of improved market dynamics and some prudent steps taken by the management to control the Company's operating cost structure helped the company to post healthy cash flow numbers. Management expects that all future operating capital expenditures would be financed by cash flow from operations, which is quite impressive and commendable. On the YTD basis in FY2020, the Company clocked CAD 762.7 million in free cash flows. 

Source: Company 

• Robust liquidity: The Company’s financial condition remains solid, given its strong balance sheet and the group has maintained sufficient liquidity to satisfy its financial obligations. Cash and cash equivalents, including short-term deposits, were CAD570.1 million, and the Company’s credit facilities had available credit of CAD757.0 million. Combined, the Company believes this liquidity of CAD 1.3 billion on September 30, 2020, is sufficient to meet cash flow needs. 

Financial overview of Q3 2020 (in thousands of Canadian dollars, except per share figures)

Source: Company

• Sales in Q3 2020 reported by the company stood at CAD 1,637.4 million, down by CAD 102.6 million from CAD 1,740.0 million in Q3 2019. The revenue declined as the product sales under the Industrial segment decreased by 21.6%, and Sales for the Transportation segment declined by 1.5% due to adverse conditions associated with the global COVID-19 pandemic.
• Operating Earnings increased to CAD 176.1 million in Q3 2020, compared to CAD 142.3 million in Q3 2019. The rise in operating income was primarily due to the low cost of sales coupled with low SG&A expenses.
• Net earnings were CAD 125.4 million in Q3 2020, compared to CAD 98.2 million in the previous corresponding period. The rise in net earnings was primarily due to above-stated reasons, partially offset by higher income tax provisions. 

Risks associated with Investment

The company is prone to many risks associated with the nature of its business which could hamper its performance. Some of these risks include fall in demand from automobile manufacturers, disruptions in supply chain, technological change, increased prices of raw materials and commodities, etc.

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock recommendation

Since resuming production in mid-May, the Company's focus has been around Recovery, Restarting and Rejuvenation. Further, production volume is also improved as automotive production in North America and Europe restarted in May, which has materially improved the company’s performance. Despite these positive signs, the Company continues to be cautious around costs and capital spending uncertainties. We believe that the industry had seen the bottom from the volume perspective, and the Company is looking forward to the broader industry and economic recovery. The Company's new business wins are maintaining a healthy launch book of more than CAD 4.1 billion. Therefore, based on the above rationales and valuation, we recommend a "Buy" rating at the closing price of CAD 72.21 as on January 13, 2021. We have considered Magna International Inc, Martinrea International Inc, NFI Group Inc, etc. as the peer group.

Source: Refinitiv (Thomson Reuters)

Stantec Inc.

Stantec Inc. (TSX: STN) is a global engineering and construction firm, which offers services like engineering, architecture, interior design, landscape architecture, surveying, environmental sciences, project management, and project economics, from initial project concept and planning through to design, construction administration, commissioning, maintenance, decommissioning, and remediation.

Key Highlights:

• Stable Topline growth: Over the years, the company reported stable income generation from the infrastructure, buildings, environmental services and water segments, backed by diversified asset-based across several geographies and sectors. Moreover, the company has a resilient business-model, backed by strong clientele from the public sector. The corporation further reported steady growth in the backlog, which grew to CAD 4.8 billion in Q3FY20, reflecting a growth of 12.7% since FY19.                  

Source: Company Presentation

• Robust Free Cash Flow: The company has reported strong growth in free cash flows, which grew 250% on y-o-y basis in 9MFY20, indicates strong operating resilience. Furthermore, the company has an undrawn committed revolving credit facility of ~CAD 800 million and also reported a 53% y-o-y decrease in capital expenditures, which indicates ample liquidity to combat the current economic cycle.                                                

Source: Company Presentations

• Bullish Price Trend: Shares of STN were hovering in a bullish zone, with price traded well above the support levels of 10-day, 20-day, 30-day, 40-day, 50-day, 100-day and 200-day SMAs. This implies a strong bullish price trend in the stock. Further, the MACD is rising and hovering above its 9-day SMAs, with the difference 12-day and 26-day EMAs is positive, another bullish trend.

Technical Chart (as on January 13, 2021). Source: Refinitiv (Thomson Reuters)

Q3FY20 Company Reports:

• STN announced its quarterly results, wherein the company posted Gross revenue CAD 916.5 million, as compared to CAD 952.6 million in the previous corresponding period (pcp). The decline was mainly due to an organic retraction of 4.7% on y-o-y basis, partially offset by positive foreign exchange fluctuations of 0.9%.
• Gross margin stood at CAD 479.1 million, as compared to CAD 516.1 million in the Q3FY19. The decline was primarily due to lower net revenue, while direct payroll costs stood at CAD 437.4 million, at par with CAD 436.5 million in pcp.
• EBITDA from continuing operations stood at CAD 156.6 million, at par with CAD 157.9 million in pcp, supported by a lower administrative and marketing expenses (CAD 324.1 million versus CAD 355.6 million in pcp).
• STN reported its net income at CAD 62.1 million, as compared to CAD 57.8 million in Q3FY19.
• The group reported cash and deposits of CAD 228.4 million, while total assets were reported at CAD 4,504.4   

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Slowdown in economic activities could result in lower capital allocation and may weigh on Buildings and Community Development projects and may dampen the ramp-up of new transportation projects etc.

Valuation Methodology (Illustrative): Price to CF

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The company has a diversified revenue base and expect that its Energy & Resources- midstream projects in Canada and Environmental Services segments to report stable income in the foreseeable future. Moreover, the company’s recent acquisition of Wenck, a US-based environmental engineering firm with core expertise in air, water, waste, food processing, natural resources, and infrastructure, would add value to the company’s environmental segment. For FY20, the company’s expected net debt to adjusted EBITDA is likely to be at or below the low end of the internal range of 1.0x to 2.0x. Moreover, the company has no near-term debt maturities, implies no balance sheet risk for the company. For FY21, the global revenue is expected to record a mid-single-digit growth, driven by strong performance in the regulated water market. The stock of STN appreciated ~8.5% and ~15% in the last nine months and one-year, respectively and is trading above all the crucial long-term as well as short-term support levels. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like SNC-Lavalin Group Inc, Aecon Group Inc and  WSP Global Inc. Considering the aforesaid facts, trading levels, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 44.29 on January 13, 2021.

1-Year Daily Price Chart (as on January 13, 2021). 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.