Magna International Inc

Magna International Inc. (TSX: MG) is engaged in the manufacturing and distribution of automotive components. Its segments include Body Exteriors & Structures, Power & Vision, Seating System and Complete Vehicles.

Key highlights

• Change in Management: Board of Directors of the company have appointed Seetarama Kotagiri as Chief Executive Officer, effective January 1, 2021. Don Walker, who has served as CEO between 1994 and 2001, and since 2005, will retire at the end of 2020.
• Updated outlook for FY2020:the company came out with a fresh perspective for FY2020, where it expects the adjusted EBIT margin in a range of 4% - 4.4% as compared to 2.9% - 3.3%. The company also provide estimates for 4QFY20 as well, where it expects healthy growth over the Q4 2019.

Source: Company

• Strong Liquidity:The company is enjoying strong liquidity levels. On 30 Sep 2020, the company had total liquidity of more than USD 5.3 billion comprising of Cash & Cash Equivalents of USD 1.618 billion and a credit limit of USD 3.728 billion. The current liquidity level seems sufficient enough to meet the near-term requirement.
• Dividend: The company paid a dividend of USD 0.40 per share in Q3 2020 as against a dividend of USD 0.365 per share in Q3 2019.

Financial overview of Q3 2020 (U.S. dollars in millions, except per share figures)

Source: Company

• In Q3 2020 the company’s reported Sales numbers decreased 2% or USD 190 million to USD 9.13 billion compared to USD 9.32 billion in the previous corresponding period (pcp), primarily due to lower assembly volumes and lower European light vehicle production.
• Cost of goods sold decreased USD 382 million to USD 7.68 billion in Q3 2020, compared to USD 8.06 billion in Q3 2019, primarily due to lower material, direct labour and overhead costs associated with lower sales.
• Income from operations before income taxes posted by the company in Q3 2020 was USD 436 million compared to a loss of USD 319 million in Q3 2019, primarily based on lower other expenses.
• In Q3 2020 the company reported Net income of USD 405 million compared to a loss of USD 233 million in the previous corresponding period.

Risk associated with investment

Deterioration in economic conditions may result in lower consumer confidence which typically translates into lower vehicle sales and production levels. Other risks include commodities prices, inflation, foreign currency fluctuations, suppliers’ issue, Insolvency of OEMs, governmental regulation, etc. 

Valuation Methodology (Illustrative): Price to Earnings

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company mentioned that it is likely to achieve the sales figure of USD 31.5 – USD 32.5 billion for the year 2020. Apart from that, controlled operating expenses are likely to help the company in expanding the operating margins. The management is confident of achieving the Adjusted EBIT Margin in a range of 4% - 4.4%. Therefore, considering healthy balance sheet, average debt-equity ratio, good promoter pedigree, healthy dividend yield, efficient working capital management and valuation, we have given a ‘Hold’ rating at the closing price of CAD 78.32 on 11 November 2020. We have considered Lear Corp, Aptiv PLC, Borgwarner Inc etc. as the peer group for the comparison.

MG daily technical chart. Source: Refinitiv (Thomson Reuters)

Brookfield Renewable Partners

Brookfield Renewable Partners L.P. (TSX: BEP.UN) is the owner and operator of a portfolio of assets that generate electricity from renewable resources. The Company operates as a pure-play renewable power platform. The Company’s portfolio consists of approximately 19,000 megawatts (MW) of capacity and 5,274 generating facilities in North America, South America, Europe and Asia.

Key highlights

• Stock Split:Brookfield Renewable announced that the Board of Directors had approved a three-for-two unit split of BEP’s outstanding units. The split will be implemented in a way that unitholders will receive an additional unit for every two units held. It will come into effect on Dec 11, 2020, with a record date of Dec 7,2020.
• Growth Initiatives: The group recently acquired a 1,200-megawatt shovel-ready solar project in Brazil, one of the largest solar projects globally. The project has over 75% of the contract under long term agreements.
• Increase in Funds from operations: In Q3 2020, the group generated FFO of USD 157 million or USD 0.38 per unit, an increase of 12% on Y-o-Y basis, on the back of substantial asset availability and contributions from organic growth and recent acquisitions made by the company.
• Ample liquidity: The company continues to maintain a decent financial position with USD 3.3 billion of total available liquidity, consisting of USD 288 million in cash and cash equivalents. The group do not have any material debt maturities over the next five years.
• Consistent dividend income: The company announced a dividend of USD 0.434 to its shareholders payable on December 31, 2020. The group’s dividend has grown at a CAGR of 6% since inception, which is encouraging from an income investor’s standpoint. Also, at the last traded price, the stock was offering a decent dividend yield of 2.95%.

Source: Company Presentation 

Financial overview of Q3 2020

Source: Company Filing

• The company posted revenues of USD 867 million in Q3 2020 against USD 897 million in Q3 2019. The group witnessed a nominal fall in revenue as the power generation from the hydroelectric segment was below the long-term average level, driven by drier conditions across the group’s fleet.

• Net loss in the reported quarter increased to USD 119 million against a loss of USD 18 million compared to the previous corresponding financial period. This was primarily driven by a surge in other expenses and higher depreciation.

Risk associated with investment

The company is exposed to various market risks in the ordinary course of operations that could impact its earnings and cash flows. Some important risk factors include lower demand, lower production, adverse weather conditions etc. There is also a risk that its contract counterparties could fail to meet their obligations.

Stock recommendation

The company remained focused on growing its business, while continuing to deliver on the target of 12-15% long-term returns to equity holders, by leveraging its scale and operational expertise to help governments and businesses around the world transition to a greener future. Recent, TerraForm Power transaction was immediately cash accretive, and expands the group’s wind and solar business in North America and Europe and further enhances its position as one of the largest, publicly traded pure-play renewable power businesses globally. Therefore, based on the above rationale and positive outlook, we have given a ‘Hold’ rating at the closing price of CAD 77.36 on 11 November 2020.

1-Year Price Chart (as on November 12, 2020, after the market close). 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.