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, and has operations across more than 27 countries.

Key Highlights:

• Sectoral revival supported current performance: During Q4FY20, the group reported revenue of USD 10,568 million, grew 15.76% and 146.17% from Q3FY20 and Q2FY20, respectively. Operating profit surged to USD 973 million in Q4FY20, from USD 436 million in Q3FY20 and an operating loss of USD 789 million in Q2FY20. The group reported a net income of USD 738 million, higher than USD 405 million in Q3FY20 and a loss of USD 647 million in Q2FY20. The increase was driven by better-than-expected vehicle production, supported by rising demand from the sector coupled with strong operating performance. 

• Impressive Guidance: For FY21, the company expects its top line within the range of USD 40 billion to USD 41.6 billion, from USD 32.647 billion in FY20. Adjusted EBIT Margin is expected within 7.1% to 7.5%. The group expects its net income within the range of USD 2.1 billion to USD 2.3 billion, significantly higher than USD 757 million in FY20.                                   

FY21 Guidance (Company Report)

• Introduction of eBeam technology: The group has enhanced its powertrain electrification capabilities, which is intended to help automakers achieve a zero-emission future. The above technology would provide its clients to electrify their trucks without sacrificing utility and functionality. 

Q4FY20 Financial Highlights:

• MG announced its quarterly results, wherein the company posted sales of USD 10,568 million, as compared to USD 9,395 million in the previous corresponding period (pcp). The quarter was marked by a double-digit growth from Power & Vision and Body Exteriors & Structures segments.
• The quarter was marked by higher cost of goods sold (USD 8,753 million v/s USD 8,085 million in pcp), increase in Selling, general and administrative costs (USD 448 million v/s 423 million in pcp) and inclusion of other expense amounting USD 100 million.
• Net income soared to USD 750 million, as compared to USD 445 million in Q4FY19.                 

Q4FY20 Income Statement Highlights (Source: Company Report)

Valuation Methodology (Illustrative): Price to CF based

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

Risks:  A slowdown in the economic activity might take a toll on the vehicle demand, which would affect the group’s performance. Further breakout of COVID-19 may affect the operations of the group’s facility and supply chain.

Stock Recommendation:

Recently, the group introduced the Magna EtelligentEco service, which is connected PHEV system that reduces greenhouse gas emissions by up to 38% and offers a unique cloud connectivity feature allowing it to perform several new functions previously not possible. This service would enhance the client’s offerings and is likely to provide innovative solutions to the consumers, which is a key positive. Moreover, the group has installed a new manufacturing facility in St. Clair, Michigan, which is expected to build complex battery enclosures for the 2022 GMC Hummer EV. From this production facility, the group would be able to develop vehicle’s frame and protects high-voltage batteries with ample protection-shield. 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 114.04 on March 18, 2021.

One-Year Price Chart (as on March 18, 2021). Source: Refinitiv (Thomson Reuters)

GFL Environmental Inc

GFL Environmental Inc. (TSX: GFL) is a leading diversified environmental services company in North America , providing a comprehensive line of non-hazardous solid waste management, infrastructure & soil remediation and liquid waste management services through its platform of facilities throughout Canada and in 27 states in the United States.

Key Updates:

• Acquisition of Terrapure Environmental Ltd. : The group reported the acquisition of Terrapure Environmental Ltd., which provides solid waste and environmental solutions. This acquisition would bring a high-quality, complementary asset network and customer base and would strengthen its existing service offerings across several regional markets, including Atlantic Canada. This acquisition would generate at least CAD 45.0 million of Adjusted Free Cash Flow and more than CAD 12.5 million in annual cost synergies.
• Improved Financial Metrics: The group reported improved performance in FY20, which has been reflected in the improved financials. The group reported a higher EBITDA margins of 24.7% in FY20, higher than 25.7% in FY19, supported by improved pricing, procurement and cost control etc. Moreover, cost of debt reduced to 4.5% in FY20, from 6.4% in FY19.  

 (Source: Company Presentation) 

FY20 Financial Highlights:

• GFL announced its full year result, wherein the group posted revenue of USD 4,196.2 million, higher than CAD 3,346.9 million in FY19. The increase was driven by strong momentum from Solid waste and Liquid waste segments.
• The quarter was marked by an increase in Cost of sales (CAD 4,006.1 million v/s CAD 3,073.1 million in FY19), significant rise in selling, general and administrative expenses (CAD 508.4 million v/s CAD 396.5 million in FY19).
• Loss before income taxes widened to CAD 1,355.8 million, from a loss of CAD 609.2 million in FY19.
• Net loss stood significantly higher at CAD 994.9 million versus CAD 451.7 million, a year ago.
• The group reported a cash balance of CAD 27.2 million, while total assets were recorded at CAD 15,730 million.

Income Statement Highlights- FY20

(Source: Company Report)

Risks:  Public health outbreaks, epidemics or pandemics, such as the COVID-19 pandemic, is not the only risk associated with the business which could adversely impact the business of the company, other risks are also there such as increases in labour, disposal, and related transportation costs; fuel supply and fuel price fluctuations, etc.

Valuation Methodology (Illustrative): EV to Sales

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

Stock Recommendation:

The company’s operation is directly co-related to the waste management sector and is expected to remain positive in the long run. The group made twenty-two successful acquisitions in FY20, despite COVID-19 led disruptions, which has enhanced the company’s overall cash flows and income in the recent quarters, while we believe the momentum to continue in the coming quarters too. Adjusted free cash flow surged to CAD 360.0 million in FY20, grew from a loss of CAD 82.1 million in FY19, which is encouraging. The stock of GFL has given handsome returns ~60% and ~82% in the last nine months and one year, respectively. We have valued the stock using the EV to Sales-based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Waste Connections Inc, Republic Services Inc etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 41.00 on March 18, 2021.

One-Year Price Chart (as on March 18, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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