Magna International Inc.

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

Key Highlights:

• Encouraging Macros: The company caters to the OEMs, which has exposure to electric vehicles (EV), and the demand from the EV segment is likely to surge in the coming days, while the group is highly poised to utilize the growth opportunity from the sector. Moreover, the company recently marked its presence across China through eDrive program offering, with the collaboration HASCO-Magna.                                                       

• Potential from ADAS segment to remain higher: The company provides advanced driver-assistance systems (ADAS) service, and is expected to report better than industry growth in the coming years, supported by constant innovation in software programming, strategic collaborations etc. Moreover, the company provides entire ADAS System and Software Platform, which provides one-stop solution for the major OEM’s.                                 

Source: Company Presentation

• Solid Growth from Body Exteriors & Structures Segment: In Q1FY21, the company reported encouraging performance from the Body Exteriors & Structures (revenue up 9% y-o-y) supported by higher global light vehicle production and new launches from major original equipment manufacturers (OEMs) like Ford, Jeep, GMC etc. Moreover, the company reported a higher adjusted EBITDA margin, which grew to 8.1% in Q1FY21, from 5.4% in pcp, supported by several operational efficiency strategies implemented within the segment. Notably, the above segment contributes a major portion of the total revenue (~40%).
  

• Event update: The company would release its second quarter FY21 financial results on Friday, August 6, 2021.

Q1FY21 Financial Highlights:

• MG declared its first quarter result, wherein the group reported sales of USD 10,179 million, higher than USD 8,657 million in the previous corresponding period (pcp). The growth was driven by 87% y-o-y growth from China at USD 6,027 million.
• The quarter witnessed a surge in the 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). Income from operations before income taxes climbed to USD 805 million from USD 386 million in pcp.
• Net income jumped to USD 622 million, from USD 252 million in Q1FY20.

Q1FY21 Income Statement highlights (Source: Company Report)

Risks:  The product of the company requires constant innovations and upgradations in order to remain competitive. Hence, the company might witness higher research and development costs, which may take a toll on the margin and cash flows. Moreover, a slowdown in automotive sector would affect the company’s performance.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company has a solid liquidity position of USD 7 Billion in form of the line of credit and cash equivalents, which seems to be sufficient to meet its short-term and long-term liabilities. Adjusted Debt / Adjusted EBITDA improved to 1.74x at the end of Q1FY21, as compared to 1.98x in Q4FY20.  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). Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 107.01 on July 22, 2021.

One-Year Technical Price Chart (as on July 22, 2021). Analysis by Kalkine Group 

First Quantum Minerals Ltd.

First Quantum Minerals Ltd. (TSX: FM) is a diversified mining company is engaged in the production of copper, nickel, gold, zinc, and acid, and related activities, including exploration and development.

Key Highlights:

• Tremendous Growth in Cash Flows: In Q1FY21, the company reported solid growth in its cash from operations, which stood at USD 743 million, as compared to USD 473 million in Q1FY20. The growth was reported by higher net earnings, as compared to a net loss in the previous corresponding period.
  

• Impressive Guidance: The company expects its FY21 copper production of 785,000 to 850,000 tons, higher than 778,911 tons of production in FY20. Moreover, the group expects its FY21 gold and nickel production in between 280,000 to 300,000 ounces and 23,000 to 27,000 tons. Total capital expenditure is expected at about USD 950 million, which includes USD 700 million in sustaining capital and other projects and the rest for capitalized stripping.

Q1FY21 Financial Highlights:

• FM announced with its quarterly result, wherein the company posted revenue of USD 1,678 million, higher than USD 1,182 million in Q1FY20. The surge was aided by strong growth from both the copper and gold segments.
• Gross profit stood at USD 540 million, jumped from USD 147 million in the previous corresponding period. The increase was driven by higher revenue, partially offset by a higher cost of sales (USD 1,138 million v/s USD 1,035 million in Q1FY20).
• The quarter witnessed higher general and administrative costs (USD 27 million v/s USD 22 million in pcp), while lower finance costs supported the profitability. Earnings before income taxes stood at USD 350 million, as compared to a loss of USD 145 million in pcp.
• The group reported a net profit of USD 194 million, as compared to a net loss of USD 95 million in the previous corresponding period (pcp).

Q1FY20 Income Statement Highlights (Source: Company Report)

Risk: A volatility in the underlying commodity prices would affect the realization price, which would subsequently take a toll on the cash flows and margins of the company. 

Valuation Methodology Illustrative: Price to Cash Flow

Stock Recommendation:

Despite being a capital-intensive business, the company consistently lowered its net debt in the past few quarters, which is a key positive and indicates prudent capital management and higher financial flexibility. Notably, Net debt/EBITDA covenant ratio at the end of Q1FY21 stood at 2.73x, significantly below the covenant requirement of 4.75x. We have valued the stock using the P/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 Lundin Mining Corp, Freeport-McMoRan Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 24.13 on July 22, 2021.

One-Year Technical Price Chart (as on July 22, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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