Toromont Industries Ltd

Toromont Industries Ltd (TSX: TIH) offers industry-leading rental operations, a complementary material handling business and an agricultural equipment business. The Group operates through two business segments, namely, the Equipment Group and CIMCO.

Q1FY20 Financial Highlights: Toromont reported its quarterly result wherein revenue stood at CAD 715.5 million, reflecting a 2% y-o-y growth from the previous corresponding quarter. During the earlier part of the first quarter, the business reported a decent increase in the product support and rental revenues, while during the month of March 2020, the business witnessed several challenges due to the COVID 19 pandemic and witnessed a  soft demand scenario. The quarter witnessed a solid bookings growth of 15% over Q1FY20 to CAD 337.7 million and reported higher orders from construction, power and material handling while shrinking in order book from mining and agricultural segment. Operating income, during the first quarter, stood at CAD 55 million, 6% lower from Q1FY19 due to the cascading effects from tight pricing and lower rental fleet utilization coupled with higher costs associated with fleet investment strategy. Further, a surge in the allowance for doubtful accounts contributed to the decline. Net earnings stood at 5% y-o-y lower at CAD 37.4 million, as compared to CAD 39.3 million in the previous corresponding quarter.

Q1FY20 Income statement Snapshot (Source: Company Reports)

Risk: COVID-19 took a toll on the construction sector. Any extension in lockdown measures is likely to take a toll on the demand of the group’s offerings and might disrupt the supply chain. Further, temporary shut down of businesses is likely to increase in delinquencies.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock of TIH remained resilient and appreciated ~25% and ~11%, in the last three months and one year respectively, despite a major slowdown in the equity market. At the end of Q1FY20, the group has a decent order backlog of CAD 567 million, which increased 11% from the previous corresponding period. A decent order backlog provides stable revenue visibility, which is a key positive. On the liquidity front, TIH is well equipped and has liquidity of ~CAD 750 million which seems sufficient to meet the near-term requirement. The group’s offerings are deemed essential as it serves sectors like food production, storage and distribution networks, power generation including back-up power, critical infrastructure, transportation and emergency response etc. Investors should note that the stock is trading above its 200 days simple moving average (SMA) of CAD 66.63, indicating a strong bullish pattern. We have valued the stock using Price to CF-based relative valuation and considered industry median (Machinery tools, heavy vehicles, trains & ships) etc. on NTM basis and arrived at a target price which implies a potential upside in lower single-digit (in percentage terms). Hence, we recommend a ‘Hold’ on TIH stock at the closing price of CAD 68.16 as on June 23, 2020.

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

Hardwoods Distribution Inc

Hardwoods Distribution Inc (TSX: HDI) is a construction & materials company based out of Canada. It is engaged in the business of hardwood lumber wholesale distribution and related speciality products and sheet good. The Group’s operations are divided into two Geographic segments, i.e. Canada and the United States. The Company supplies its products to multiple industries including speciality wood products, furniture, millwork, moulding and cabinet.

Business Update for May 2020

On 10^th June 2020, Hardwoods Distribution released an update on the business performance for the month of May 2020. The Groups’ daily organic sales (average) increased by 16 per cent for the period versus April 2020. HDI witnessed an increase in the activity across the distribution network, and the pace of construction increased in many regions. In April 2020, the Company took multiple steps to reduce costs and support in generating optimistic cash flow. The Group generated additional cash by reducing working capital in April and May. In the last two months, HDI reduced its net debt position and stood in line with the management focus on cash flow generation. At present, HDI is not able to quantify the impact of the covid-19 pandemic on the second quarter and full-year 2020. The Company is confident towards its cash flow profile, business model and liquidity to tackle the uncertain time. The Group strongly manage its business for short-term and making progress in achieving objectives for long-term. In May 2020, HDI launched DOS (DesignOneSource) as a part of digital strategy, which provides designers and architects seamless support through an interactive online platform for decorative surfaces.

Share Price Performance

Daily Chart as of 23 June 2020, after the market closed (Source: Refinitiv, Thomson Reuters)

Hardwoods Distribution Inc shares closed at CAD 16.13 at the time of writing after the market close on 23 June 2020. Stock's 52 weeks High is CAD 17.23 and Low is CAD 7.40.

Conclusion

The Company continues to implement the strategy and business model to deliver returns. The Group, through its wide-ranging scope, had accelerated growth organically and through acquisitions and strategic partnerships. HDI has a well-positioned balance sheet with a decent operating facility to carry daily operations. The Company has shown an increase in sales in the month of May 2020 with an increase in the activity across the distribution network in multiple regions in which it operates. The steps taken by the Group to reduce costs in the month of April generated strong cash flow and helped in reducing net debt position. At present, HDI is not able to quantify the impact of covid-19 but is confident toward its cash flow profile, business model and liquidity to combat the impact of the virus. The Company is focused on achieving long-term objectives with a strong focus on short-term business performance. The recently launched DOS (DesignOneSource) is a part of long-term digital strategy and will help the Company to increase its business through an interactive online platform.

Based on the above rationale, we have given a “Hold” recommendation at the closing price of CAD 16.13 (as on 23 June 2020).

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.