Martinrea International Inc

Martinrea International Inc (TSX: MRE) is a Canada based manufacturer and produces metal parts and fluid management systems. The products are used primarily in the automotive sector by the majority of vehicle manufacturers. The group also produces aluminum engine blocks, specialized products, suspensions, chassis modules and components, and fluid management systems for fuel, power steering and brake fluids.

Q2FY20 Financial Highlights: MRE announced its quarterly results, wherein the company posted a significant dip in the top-line at CAD 460.564 million as compared to CAD 948.533 million in the previous corresponding period (pcp). This decline was primarily attributable to an overall industry slowdown, due to COVID-19 pandemic, coupled with lower tooling sales. However, the negatives were partially offset by foreign exchange translation of U.S.-denominated production sales, coupled with the launch of new programs related to the production of ventilator stands for General Motors. Sales from North America, the major contributor, was significantly down by ~58% on y-o-y basis to CAD 318.134 million while income from Europe stood at CAD 99.988 million, reflecting a fall of ~40%. The company reported a gross loss of CAD 12.459 million as compared to a gross profit of CAD 154.778 million in pcp, due to a lower income, a surge in costs of sales and higher depreciation. Research & development and SG&A were subsequently lower, and the company reported higher impairment charges of CAD 85.783 million as compared to CAD 18.502 million in pcp. The group posted a net loss of CAD 146.886 million as compared to a net profit of CAD 28.122 million, a year ago.

Q2FY20 Financial Highlights (Source: Company Reports)

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Risks: The second wave of COVID-19 might result in operation shut down and supply chain disruption, which would hamper the group’s performance. The group is operating in the highly cyclical nature of the automotive industry and the industry’s dependence on consumer spending, and general economic conditions would affect the demand.

Stock Recommendation: The Stock of MRE corrected ~23% so far this year due to a weak auto sale on account of COVID 19 pandemic. Investors should note that the stock closed above its 200-days simple moving average (SMA) of CAD 10.77, reflecting a bullish pattern. The Company has acquired Metalsa S.A, de C.V. in Q1FY20, which is likely to contribute to the top-line in the coming years. Further, we have seen a revival in the Canadian Auto sales for the month of July 2020, which is a key positive for the Company. The group believe that the industry had seen the bottom from a volume perspective, look forward to the broader industry and economic recovery. The group stated that a phased restart of the Company’s manufacturing facilities and dependent functions commenced in May and June 2020 and continued into the third quarter as OEMs began producing vehicles again. All of the group’s facilities are operational now, and the group is anticipating strong third quarter. The Company seems to have sufficient liquidity to surpass the current challenging time. The stock rose 39% in the last three months, outperforming the index by ~23%. We have valued the stock using the EV/EBITDA based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered peers like Magna International Inc, Linamar Corp and NFI group etc. Hence, considering the aforesaid facts, risk factors and current price movement, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 10.90 on August 12, 2020.

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

Magna International Inc.

Magna International Inc. (TSX: MG) is an automotive supplier of products including exteriors, interiors, seating, roof systems, body and chassis, etc. The Company has 347 manufacturing operations and 94 product development, engineering and sales centers across 27 countries. 

Q2FY20 Financial Highlights: Magna International Inc. declared its quarterly results, wherein the Company reported a plunge in top-line due to significantly lower demand from North America and Europe Geographies. Revenue, during the quarter, stood at USD 4,293 million, considerably lower than to USD 10,126 million in the previous corresponding period (pcp). The erosion in the sales volumes was due to the suspensions and volume reductions made by the clients on account of COVID-19 pandemic. The Company posted a loss from operations before income taxes at USD 789 million as compared to an income of USD 595 million in pcp, due to a contraction in top-line, partially offset by a significant reduction in the cost of goods sold, lower selling, general and administrative expense. Net loss stood at USD 647 million as compared to a net profit of USD 452 million, a year ago. The Company ended the quarter with cash and cash equivalents of USD 533 million while total assets stood at USD 24,280 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Company’s performance is highly dependent on the order book of the top six clients; loss of a key client would result in financial loss. The second wave of COVID-19 might result in production shut down and supply chain disruptions, which would hamper the financial performance.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation: The stock moved northward in recent past and appreciated ~14% and 34% in the last one month and three months. As per the Management’s its FY20 revenue is estimated at USD 30 million to USD 32 million, while adjusted EBITDA margin is expected around 2.9% to 3.3% which is decent if we consider the current macro scenario. The Automobile industry has witnessed a demand improvement in the month of July 2020, which is a strong indication of a possible economic revival. At the same time, the sustainability of demand from the major regions would ensure the improvement of the order book for a longer-term basis. The Company has a decent market share along with an esteemed clientele, and the Company would be the frontrunner in case the industry revives. The stock closed above the 200-day moving average of CAD 62.31, indicating a bullish trend. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a single-digit upside potential (in % terms). For the said purpose, we have considered peers like Borgwarner Inc, Lear Corp and Gentex Corp for the purpose. Hence, considering the aforesaid facts, demand sustainability, current price movement, we recommend a ‘Hold’ recommendation on the stock at the closing market price of CAD 70.82 on August 12, 2020.

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

Disclaimer

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