Finning International Inc.

Finning International Inc. (TSX: FTT) is a dealer and distributor of heavy-duty machinery and parts and operates through Caterpillar brand. FTT sells and rents Caterpillar machinery to the mining, construction, petroleum, forestry, and power system application industries.

Key Highlights:

• Strong Growth in Free Cash flow: During 2020, the group recorded robust growth in Free Cash Flow. The group’s free cash flow increased to CAD 578 million in 9MFY20 from CAD 42 million in FY19. We believe, the above momentum is likely to sustain in the coming days, supported by gradual recovery across UK & Ireland, which would support the company’s future cash flows.                            

Source: Company Presentation

• Enhanced Digital and e-Commerce Capabilities: The company adopted the usage of new technologies, which has supported the company for the identification of potential business prospects. Moreover, the company made recent investments to strengthen its omnichannel, which are likely to support the company’s performance in the foreseeable future.

Q3FY20 Financial Highlights:

• FTT announced its quarterly results, wherein the company posted a 21% y-o-y decline in revenue of CAD 1,553 million in the previous corresponding period (pcp). The decline was primarily attributed to a lower income from the company’s all operating segments.
• The quarter was marked by a lower SG&A expense of CAD 290 million, as compared to CAD 333 million in Q3FY19. The group reported a 7% y-o-y growth in EBITDA at CAD 215 million, while the EBITDA margin improved 14.9%, from 11.1% in pcp.
• Free cash flow soared to CAD 316 million, as compared to CAD 165 million in Q3FY19.
• Net income stood at CAD 88 million, as compared to CAD 76 million in the Q3FY19.
• The Corporation reported a cash and cash equivalent of CAD 453 million, while total assets were recorded at CAD 5,535 million.

Q3FY20 Financial Highlights (Source: Company Reports)

Risk: Due to the ongoing pandemic, the company might witness a sluggish demand across the heavy machinery and vehicles segments which might act as a drag for the company. The overall market activity remained significantly lower than the last financial year, which is a reason for concern for the company.

Valuation Methodology: P/CF Based (Illustrative)

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

Stock Recommendation:

The group maintains a strong balance sheet with solid EBITDA and free cash flow generation coupled with lower finance costs. Moreover, with the advancement of the technology, the company would strengthen its customer relationships which is likely to support organic growth in the foreseeable future. The company’s margin has been supported by the implementation of a technology platform in South America, which has led to operational efficiency. The stock closed above the technical support level of 100-days, 150-days and 200-days SMA, indicating a bullish price trend. We have valued the stock using P/CF based relative valuation method and have arrived at a target upside of single-digit (in percentage terms). For the said purposes, we have considered peers like Toromont Industries Ltd, Cervus Equipment Corp etc. Hence, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 27.16 on January 4, 2021.

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

Toromont Industries Ltd

Toromont Industries Ltd (TSX: TIH) is a Canadian industrial company which operates through two business segments, namely Equipment Group and CIMCO. The company primarily operates across Canada and derives a marginal portion of the income from the United States of America.

Key Updates:

• Improved Cash from Operations: The company reported a strong cash generation and posted cash from operating activities of CAD 200.914 million in 9MFY20, significantly higher from a loss of CAD 20.191 million in pcp. The company reported impressive working capital management and has reported lower additions to rental equipment, which has supported the company’s overall cash flows.

  Source: Company Reports

• Cost efficiency measures supported profitability: For 9MFY20, the company reported a lower cost of goods sold (CAD 1,895.454 million versus CAD 2,002.567 million in pcp) and a decline in Selling and administrative expenses (CAD 346.006 million versus CAD 366.652 million in pcp), which has supported the company’s bottom line. Thus, the company’s cost control measures have cushioned the company’s profitability during the tepid economic conditions.

Q3FY20 Financial Highlights:

• TIH announced its quarterly results, wherein the company posted revenue of CAD 921.656 million, compared to CAD 975.221 million in the previous corresponding period (pcp).
• Gross profit stood at CAD 226.613 million, as compared to CAD 243.379 million in the previous corresponding period (pcp). The decrease was primarily due to lower revenue, which was partially offset by a lower cost of goods sold (CAD 695.043 million versus CAD 731.842 million in pcp).
• Operating income stood slightly lower at CAD 112.877 million, as compared to CAD 114.485 million in Q3FY20, supported by a significantly lower selling and administrative expenses (CAD 113.736 million versus CAD 128.894 million in pcp.)
• The company reported net earnings of CAD 77.359 million, as compared to CAD 79.687 million in the previous corresponding period (pcp).
• The company reported a cash balance of CAD 471.022 million, while total assets stood at CAD 3,382.657 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: The company’s operations have been impacted by reduced economic activities, and the continuation of the above trend would likely to dampen the overall performance of the company.

Valuation Methodology: Price to Cash Flow Based (Illustrative)

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

Stock Recommendation:

The company reported an impressive booking from its Equipment Group during the third quarter of FY20 at CAD 371.1 million, reflecting a growth of 12% on a y-o-y basis. We believe the above trend to continue in the coming days, supported by stable order flow combined with a large and diversified installed base. Furthermore, the long-term outlook for infrastructure projects and other construction activity remains positive across most of the regions. Further, the stock closed above the 200-days, 150-days and 100-days simple moving average (SMA), indicating a bullish price trend. We have valued the stock using Price to Cash flow-based relative valuation method and have arrived at a target upside of single-digit (in percentage terms). For the said purposes, we have considered peers like Finning International Inc, Stantec Inc etc., SNC-Lavalin Group Inc etc. as a peer group. Hence, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 88.5 on January 4, 2021.

TIH Daily Technical Chart (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.