Boyd Group Service Inc

Boyd Group Service Inc (TSX: BYD) is Toronto listed operator of collision repair facilities in Canada and in the United States. It also manages auto glass, autobody and assured automotive operations. The Company operates through over 600 locations and around 8,500 employees.

Trading Update (for the three months ended 31^st March 2020, CAD)

(Source: Company Website)

As on 13^th May 2020, the Group reported its Q1 FY20 update and reported a 12.6 per cent increase in sales from $557.9 million in Q1 FY19 to $628.4 million in Q1 FY20. Similarly, adjusted EBITDA rose by 4.0 per cent from $78.3 million in Q1 FY19 to $81.4 million in Q1 FY20.  Net earnings grew by 5.9 per cent in Q1 FY20 versus Q1 FY19. At 31^st March 2020, the Group reported $576 million of cash balance and net debt of $399 million (excluding lease liabilities, with no substantial maturities until March 2025). Consequently, the Group reported a first-quarter dividend of $0.138 per share.

Share Price Performance

Daily Chart as on 22^nd May 2020, after the market closed (Source: Refinitiv, Thomson Reuters)

BYD’s shares closed trading at CAD 207.96 on 22^nd May 2020, up by 2.13% against the last day closing price. Stock's 52 weeks High is CAD 231.52 and Low is CAD 125.01. The Group’s stock is reflecting higher volatility as against the benchmark index based on the Company’s beta of 1.28 (5-year monthly beta). From the technical standpoint, 3 days, 9 days and 14 days relative strength index of the stock was unfavourable, and the price could fall further from the current trading level.

Conclusion

The impact of COVID-19 has already affected the first-quarter sales by around $21 million and $6 million in adjusted net earnings. Moreover, sales were down around 40 per cent even in the trading of April and May thus far. The continually evolving nature of the pandemic putting immense pressure over the operations of Boyd's business with around 40-50 per cent reduction in demand.  As Company strongly believes in accretive growth, it is not able to undertake acquisitions due to scarcity of funding amid COVID-19 pandemic. Moreover, the rapid change in technology producing safer vehicles which are reducing the number of accidents claims and thus, the lesser scope for collision repair. Meanwhile, the Group has adopted several measures to reduce costs such as deferring capital expenditure plans, staff reduction, deferring lease payments, among others. Also, the Company is preserving the liquidity to invest when the demand revives. Further, the Group has recently taken a credit facility to navigate the uncertain short-term period. In the long run, the Group plans to supplement organic growth with accretive opportunities, while they have halted all acquisition plans in the short run. Moreover, the management sounds confident of increasing market share in North America over the long-term period.

Based on the above rationale, we have given a “Watch” recommendation at the closing price of CAD 207.96 (as on 22^nd May 2020), while we look for any upcoming catalysts in the near term.

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.

Q1FY20 Financial Highlights: For the quarter ended March 31, 2020, sales of MRE fell 14.7% to CAD 872.70 million, led by a lower performance in North America and Europe, which was partially offset by an improved operating performance from the Rest of the World segment. The performance was impacted due to the lower industry demand, which took a toll on the sales volumes and an adverse effect of foreign exchange. Gross profit slump to CAD 120.24 million from CAD 157.50 million in Q1FY19 due to lower revenue and higher depreciation, offset by a fall in the cost of sales. The Company was able to manage its cost and reported a fall in selling, general and administrative expense, which came in at CAD 57.41 million against CAD 60.86 million in the previous corresponding quarter. Operating income declined to CAD 49.20 million from CAD 83.46 million in the previous corresponding period, due to a significantly lower gross margin. Net income for the period stood at CAD 28.96 million versus CAD 55.27 million in pcp. The group exited the quarter with cash and cash equivalents of CAD 156.51 million and total assets of CAD 3,567.81 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock of MRE corrected ~41% so far this year due to a negative investor’s sentiment persists across the global markets. The Company supplies automotive parts to the car manufacturers across the globe. The economy is witnessing a sea change with respect to the demand dynamics and is adversely affected due to a decline in car sales across the globe. Most of the OEM’s has suspended the manufacturing operations during the pandemic, and rapid dissipation of customer demand had a negative impact on the Company’s financial results. The trend is likely to continue in the second quarter as most of the manufacturing units have not resumed the operations. Further, we do not see any respite in terms of demand as car sales are expected to remain low in the near to medium term. Hence, we prefer to remain on the sidelines. Further, on an NTM basis, the stock is quoting at a P/E multiple of 9.1x, as compared to the industry (Consumer Cyclicals) average of 6.7x. Hence, we recommend a ‘Watch’ stance on the stock at the current closing price of CAD 8.55, on May 22, 2020.

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

Disclaimer

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