Canadian National Railway Company

Canadian National Railway Company (TSX: CNR) is engaged in the transportation business and transports more natural resources, manufactured products, and finished goods throughout North America every year.

Key Highlights:

• Merger with Kansas City Southern to support future growth: Recently, the company announced that its intention to merge Kansas City Southern at a price consideration of CAD 33.6 billion. With the above collaboration, the entity would get an industry-leading growth profile by connecting to North America’s industrial corridor. Moreover, the above would create new avenues for shippers and would support the company’s future growth prospects.  

• Solid Operation metrics supported by resilient business model: Despite the ongoing economic jolt, CNR reported improvement within the workload, train length, car velocity and train weight, which remains encouraging. The company’s growth is driven by strong higher teen-digit y-o-y growth from the grains & fertilizers and intermodal segment.                     

Source: Company Presentation 

• Signs of Revival from certain sectors: As per the Management, demand from the Intermodal segment is likely to be benefitted from strong container imports to Canadian and U.S. destinations due to higher demand from the e-commerce segment, while inventory renewal from several manufacturers would support the growth. Within the industrial products, strong demand is expected from the renovation sector and housing market, which would further support the lumber and panel volumes. Last but not least, recovery in the refined petroleum products, frac sand, and crude oil markets would likely support the upcoming revenue.

Q1FY21 Financial Highlights:

• CNR declared its first quarter result, wherein the group reported revenues of CAD 3,535 million, v/s CAD 3,545 million in the previous corresponding period (pcp).
• Total operating expenses stood lower at CAD 2,208 million, v/s CAD 2,330 million in pcp. The decline in expenses was primarily driven by lower Purchased services and material costs (CAD 549 million v/s CAD 578 million in pcp) and a recovery of loss on assets held for sale amounting to CAD 137 million, partially offset by higher labor and fringe benefits expenses (CAD 785 million v/s CAD 743 million in pcp). Operating income was higher at CAD 1,327 million v/s CAD 1,215 million in pcp.
• The company reported a net income of CAD 974 million, down from CAD 1,011 million, primarily due to a higher income tax expense (CAD 317 million v/s CAD 154 million in pcp).
• Cash and cash equivalents were recorded at CAD 518 million, while total assets were recorded at CAD 44,964 million.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: During the quarter, the group’s operations were impacted due to the sluggish economic scenario. Demand from the segments like Petroleum and chemicals, Automotive, Coal, Forest products etc., remained under pressure due to lower activities from these sectors. Continuation of the above trend would dampen the company’s performance.

Valuation Methodology (illustrative): Price to CF based

All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

Recent collaboration with Kansas would create an express route that connects the U.S., Mexico and Canada and would offer hassle-free services to the end consumers through single-operator service. Moreover, the above would retain access to all existing gateways, which would further boost the route choices and ensure robust price competition. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like United Parcel Service Inc, Expeditors International of Washington Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 128.27 on May 20, 2021.

One-Year Price Chart (as on May 20, 2021). Source: Refinitiv (Thomson Reuters)

Magna International Inc.

Magna International Inc. (TSX: MG) is a mobility technology company and has 342 manufacturing operations and 91 product development, engineering and sales centres. The group has operations across more than 27 countries.

Key Highlights:

• Improved Cash flows in turbulent times: The company reported a higher cash flow from operations (USD 661 million in Q1FY21 v/s USD 639 million in Q1FY20), supported by a higher net income, partially offset by a USD 372 million loss from operating assets and liabilities. Notably, free cash flow at the end of Q1FY21 increased by 13% on a y-o-y basis to USD 414 million, which is a key positive. Moreover, the company upgraded its FY21 cash flow expectation from USD 1.4- 1.6 billion earlier to USD 1.6-1.8 billion                   

Source: Company Report

• Impressive Guidance: For FY21, the company expects its total sales in between USD 40.2 to 41.8 billion, significantly higher than USD 32.64 billion in FY20. Net income is expected in between USD 2.2-2.4 billion, higher than USD 757 million in FY20. Estimated Adjusted EBIT Margin for FY21 has been revised to 7.2%-7.6% from earlier guidance of 7.1% -7.5%. For FY21, capital expenditure is expected at ~USD 1.6 billion.         

Source: Company Presentation 

Q1FY21 Financial Highlights:

• MG announced its quarterly results, wherein the company posted sales of USD 10,179 million, higher than USD 8,657 million in the previous corresponding period (pcp). The increase was driven by higher global light vehicle production and higher assembly volumes, which supported increased revenues from Body Exteriors & Structures, Complete Vehicles and Power & Vision segments. Moreover, the launch of new programs further drove the overall sales volumes.
• The quarter was marked by a higher cost of goods sold (USD 8,662 million v/s USD 7,567 million in pcp), coupled with an increase in Selling, general and administrative costs (USD 430 million v/s USD 381 million in pcp).
• Net income soared to USD 622 million from USD 252 million in Q1FY20.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks:  The products require constant innovations and upgradations in order to maintain the market share. Any slowdown in auto sector would affect the company’s performance.

Valuation Methodology (Illustrative): Price to CF based 

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

The company is looking to invest across several growth projects and product innovations in order to enhance organic growth. The management is also looking to improve its operational efficiency to drive the cash flows and profitability. The company has strong liquidity of USD 7 billion, which includes a cash balance and available credit limit of USD 3.5 billion each. The company further extend its USD 2.6 billion of credit maturity to June 2026, and currently, it has manageable debt maturities in the coming years.                               

Source: Company Presentation

Notably, Adjusted Debt/Adjusted EBITDA improved to 1.74x in Q1FY21, from 1.98x in Q4FY20, which is encouraging and indicates higher financial flexibility. We have valued the stock using the Price to CF based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Lear Corp, Aptiv PLC etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 115.94 on May 20, 2021.

One-Year Price Chart (as on May 20, 2021). 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.