Gildan Activewear Inc.

Gildan Activewear Inc. (TSX: GIL) is a vertically integrated designer and manufacturer of basic apparel, including T-shirts, underwear, socks, and hosiery. The company’s primary market belongs to the sale of blank T-shirts to wholesalers and printers. The group also sells branded clothing through retail and direct-to-consumer channels. Brands include Gildan, American Apparel, Comfort Colors, and Gold Toe. 

Key Highlights:

• Positive cash flow: The company managed to post a positive cash flow in Q1FY21, which is a key positive. Cash from operations stood at USD 20.595 million, as compared to cash used of USD 209.430 million in Q1FY20. The above was due to a higher net profit in the present quarter. Moreover, the company posted a free cash flow of USD 37.6 million in Q1FY21, as compared to a outflow of USD 235 million in the previous corresponding period.
  

• Positive Outlook: The company has a strong brand presence across America and is focusing on enhancing its presence across several international markets and is looking to increase its total capacity. The group’s manufacturing units are located strategically across Central America, the Caribbean, and Bangladesh etc., which provides an efficient and competitive cost structure due to the low cost of labor. Moreover, the company is witnessing tremendous traction from the eCommerce segment and is looking to enhance its logistics and distribution network in order to cater to the growing traffic within the segment. We expect this would improve business prospects in the coming years.

Q1FY21 Financial Highlights:

• GIL announces its quarter result, wherein the company reported net sales of USD 589.6 million, reflecting a surge of 28.4% on y-o-y basis. The growth was primarily aided by a 30.1% y-o-y growth in activewear at USD 484.6 million. Meanwhile, double-digit volume growth was witnessed from the North American and international imprintables markets, supported by favorable product mix.
• Gross profit surged to USD 188.5 million, reflecting a growth of 77% on y-o-y basis. Gross margin stood higher at 32.0% of sales, v/s 23.2% in Q1FY20.
• Adjusted EBITDA stood significantly higher at USD 145.8 million compared to USD 50.2 million in pcp.
• The company turned profitable and posted net earnings of USD 98.5 million, as compared to a net loss of USD 99.3 million in Q1FY20.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Soft economic outlook, coupled with lower consumer spendings, might lead to a lower product demand which would eventually eroder the sales volume. Furthermore, a weak product mix might weigh high on the margins as well. A change in the consumer preference towards other brands would lead to price competition and might weigh on the margins.

Valuation Methodology (Illustrative): Price to Earnings  

Stock Recommendations:

Net debt leverage ratio improved to 2.1x in Q1FY21, from 3.5x in Q1FY20. Adjusted operating margin remained elevated at 18.7% in Q1FY21, from 4.3% in Q1FY20. These are the indications of solid operational efficiency and improved financial flexibility. We have valued the stock using the Price to Earnings value-based relative valuation method and have arrived at a target upside of single-digit (in percentage terms). For the said purposes, we have considered industry (Textiles and Apparel) mean on an NTM basis. Hence, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 43.07 on July 08, 2021.

One-Year Technical Price Chart (as on July 08, 2021). Source: REFINITIV, Analysis by Kalkine Group

NFI Group Inc.

NFI Group Inc. (TSX: NFI) is a Canadian automobile manufacturer and operates through two segments: Manufacturing operations and Aftermarket operations. Manufacturing operations derives the major revenue and is focus on the manufacture of transit buses for public transportation and motor coaches.

Key Highlights:

• New Order of 40 additional hybrid-electric buses: The company reported a new order win from Westchester County Department of Public Works and Transportation (Bee-Line), wherein the company would provide 40 additional Xcelsior ^® forty-foot hybrid-electric buses. Thus, the total backlog from the company’s backlog from the Bee-Line fleet to 279 electric busses. Bee-line carries more than 27 million passengers annually in the White Plains region of New York state.

• Impressive Outlook: The company expects its FY21 revenue to grow 16% from FY20 at about USD 2,800 million to USD 2,900 million. The company expects its adjusted EBITDA to grow by 40% to 50% in FY21 to USD 220 million to USD 240 million. Notably, for revenue, the company reported 8% CAGR from FY15 to FY19, while the company’s adjusted EBITDA has grown at a CAGR of 21% during the same time frame.                               

FY21 Outlook (Source: Company Presentations)

Q1FY21 Financial Highlights:

• NFI announces its quarterly result, wherein the company posted revenue of USD 574.119 million as compared to USD 710.384 million in Q1FY20. The decline was primarily attributable to lower production volumes resulting from the ongoing COVID-19 pandemic, which caused a slide in the order book due to order deferrals and delays or cancellations.
• Gross profit stood at USD 85.834 million, slightly higher than USD 83.685 million in Q1FY20. The improvement was primarily due to a significantly lower cost of sales of USD 488.285 million v/s USD 626.699 million in pcp.
• The quarter was marked by lower sales, general and administration costs and other operating expenses (USD 57.268 million v/s USD 59.457 million in pcp), higher interest on long-term debt, along with a gain from interest rate swap.
• Net earnings stood at USD 7.033 million, as compared to a net loss of USD 67.239 million in Q1FY20.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks:  The company’s performance is directly correlated to the international automobile market, and postponement of capital expenditure by both public and private bodies, and imposition of fresh restriction due to rise in COVID 19 cases might impact the company’s performances.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The long-term scenario of the sector looks attractive, while the company targets its revenue at USD 3.9 billion to USD 4.1 billion, aided by market recovery in NA Bus and Coach and UK transit and the company’s expansion in Europe and APAC region. The company also expects a lower cost base, which is generated from the company’s forward initiative, which is a key positive. Moreover, the stock of NFI carries an attractive dividend yield of ~3.0%, which is decent considering the current interest rate scenario. 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 Boyd Group Services Inc, Uni-Select Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of NFI at the last closing price of CAD 27.89 on July 08, 2021.

One-Year Technical Price Chart (as on July 08, 2021). Analysis by Kalkine Group

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

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