Magna International Inc.

Magna International Inc. (TSX: MG) is a mobility technology company. The Company’s segments include Body Exteriors & Structures, Power & Vision, Seating System and Complete Vehicles.

Recent Announcement

• On October 04, 2021, Magna announced the termination of the merger agreement with Veoneer.

Key Highlights

• Strengthen Balance Sheet: As of June 30, 2021, the company’s long-term debt stood at USD 3,941 million, reduced from USD 3,973 million reported as of December 30, 2020. Operating lease liabilities has also lowered from USD 1,656 million as of December 31, 2020, to USD 1,563 million as of June 30, 2021. Shareholder’s equity has increased by USD 688 million to USD 12,058 million as of June 30, 2020. Cash and Cash Equivalents improved by USD 158 million to USD 3,426 million.

Source: Company Filing 

• An Income Play: At the last closing, MG shares was offering a dividend yield of 2.08%, which is decent given the lower interest rate environment. Moreover, the company has an investment-grade balance sheet, and a yield more than 2% is relatively higher than investment grade 10-Year Canada Government Bond Yield of 1.59% (as of October 18, 2021). Further, the company has a track record of consistent dividend payments over the past decade.

Dividend History. Source: REFINITIV, Analysis by Kalkine Group

• Generating Higher Return on Shareholder’s Money: The company is generating a TTM ROE (Common Equity) of 20.1%, which is significantly higher compared to peer's TTM ROE (Common Equity) of 13.0%.
• Strong Margin of Safety: MG shares are offering a free cash flow yield of approximately 6.3%, significantly higher compared to peer’s median free cash flow yield of 4.5%, implies a greater margin of safety to existing as well as potential shareholders.

Financial Highlights: Q2FY21

Source: Company Filing

• During the second quarter of FY21, the company’s total sales increased by 110% to USD 9.0 billion, compared to USD 4.3 billion in the second quarter of FY20. This was mainly driven by higher global light vehicle production and higher assembly volumes.
• In the quarter under review, Global light vehicle production increased 58% on a YoY basis. The solid YoY production was largely attributable to unprecedented, industry-wide production suspensions in the second quarter of 2020 due to the COVID-19 pandemic and partially offset by a shortage of semiconductor chips.
• In Q2FY21, the company reported cash from operating activities was USD 528 million, an increase of USD 1.8 billion over the second quarter of FY20.

Valuation Methodology (Illustrative): Price to Sales

Stock Recommendation

The company reported robust performance in Q2FY21, strengthened balance sheet, higher return on Equity (Common Equity) and bolstered cash position. Further, the company is expected to perform well in the coming quarter given the recovery in automobile sales. Moreover, the stock also offers a decent dividend yield, which positioned it well for income-seeking investors. Therefore, based on the above rationale and valuation, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 103.32 on October 18, 2021.

1-Year Price Chart (as of October 18, 2021). REFINITIV, Analysis by Kalkine Group

Franco-Nevada Corporation

Franco-Nevada Corporation (TSX: FNV) is a gold-focused royalty and strea­­m company.

Recent Announcement

• Franco-Nevada to release third Quarter 2021 results on November 03, 2021 (aftermarket).
• Conference call and webcast is scheduled for November 04, 2021 (at 10:00 AM ET)

Key Highlights

• Industry Leading Margins in Q2FY21: During the quarter, the company reported industry-leading margins. This reflects the strength of the business model that is able to generate a relatively higher margin as compared to its industry peers.

Source: REFINITIV, Analysis by Kalkine Group

• Maintaining Strong Competitive Advantage: The company has maintained consistency in terms of maintaining the margin profile. Apart from one bad quarter of 2020 (March 2020) due to Covid-19 led disruptions, the company has consistently maintained gross margin above 50% since September 2019, EBITDA margin above 75%, operating margin above 50%, and Net Margin above 40%. This reflects the strong competitive advantage of the company to convert sales into higher profitability.

Source: REFINITIV, Analysis by Kalkine Group

• No Balance Sheet Risk: The company is carrying a debt-free balance sheet which reflects the strength of the business model that throws a lot of free cash flows, which is adequate to fund its capex and working capital requirements. The company is in zero debt as of June 30, 2021, which implies no balance sheet risk.

Financial Highlights: Q2FY21

Source: Company Filing

• In Q2FY21, revenue was up by 77.6% to USD 347.1 million on the back of higher average gold realization prices and higher gold sold during the quarter as compared to the same quarter of the previous financial year.
• Adjusted EBITDA in Q2FY21 soared to USD 290 million and reported a jump of ~83% on a YoY basis.
• Net cash generated from operating activities in Q2FY21 stood at USD 245.2 million as compared to USD 150.2 million reported in Q2FY20.
• Net Income for the quarter under consideration stood at USD 175.3 million, nudged by 86% on a YoY basis, driven by improved margin profile and higher cash flows.

Risk Associated to Investment: The company is largely exposed to adverse volatility in the gold prices and other underlying commodities prices (silver and others), supply-chain-led disruption on the back of a resurgence in covid-19 cases, and other macro-economic risks.

Stock Recommendation: The company is built upon strong fundamentals with an industry-leading margin profile, track record of consistently maintaining a healthy margin profile, debt-free balance sheet, and availability of free cash flows. Further, the company is expected to report decent Q3FY21 results on the back of stable underlying commodity prices in Q3FY21, and it would continue to leverage its balance sheet strength to throw higher free cash flows. Hence, based on the above rationale, we recommend a "Hold" rating on the stock at the closing price of CAD 174.19 (as of October 18, 2021).

1-Year Price Chart (as of October 18, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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.