Nutrien Ltd.

Nutrien Ltd. (TSX: NTR) is a leading chemical manufacturing company and produces, distributes products like fertilizers and industrial-related feed products, which includes potash, nitrogen, diammonium phosphate, ammonium phosphate and phosphoric acid, urea, and nitric acid.

The Board of Directors declared a quarterly dividend of USD 0.45 per common share payable on July 17, 2020.

Guidance: For FY20, the Company expects net earnings per share within the range of USD 1.50 to USD 2.10, while adjusted EBITDA is expected in between USD 3.5 billion to USD3.9 billion. Potash shipments are expected in between 65 and 67 million tonnes, lower from FY19, due to soft demand from Southeast Asia. The Company expects its Nitrogen sales within the range of 10.9 million tonnes to 11.5 million tonnes.

Q1FY20 Income Statement highlights: NTR came up with its quarterly results, wherein the Company reported sales of USD 4,186 million, higher than USD 3,719 million in pcp. The increase was driven by higher demand from retail and nitrogen segments, while lower sales from potash and phosphate segment remained a drag. The period was marked by a strong performance from the US and Australia geography followed. Gross margin came lower at USD 873 million compared to USD 975 million in pcp, due to a surge in cost of goods sold and higher freight, transportation and distribution costs. Earnings before finance costs and income tax stood at USD 82 million, significantly lower than USD 176 million, due to an increase in selling expenses, general & administrative expenses. The Company reported a net loss of USD 35 million, as compared to a profit of USD 41 million. Free cash flow declines to USD 181 million, as compared to USD 382 million in pcp.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: Price to CF Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock corrected 18% so far this year amid a drastic correction in the global equity markets on account of COVID 19 pandemic. The company’s products and services have been declared as essential products, while NTR expects strong demand within its core markets coupled with an increase in major crop acreage across the US, which is likely to drive the demand for group’s product. The group also expects higher soybean acreage from Brazil in FY20, driven by improved demand dynamics from the region. Crop demand from Australia and Canada are expected to remain higher, resulting in a strong crop input demand. Also, the demand for nitrogen is likely to remain strong within North America during the planting season in FY20. In order to cater to the short-term liquidity and working capital requirements, the company has issued commercial paper.  At the current market price, the stock is offering a dividend yield of 5%, which is lucrative amid the current interest rate environment. The group is targeting to distribute ~40% to 60% of its annual cash flow as a dividend.   The stock is trading above its 20-days and 50-days Simple Moving Average (SMA) of CAD 46.97 and CAD 47.42, respectively, indicating a short-term bullish pattern. We have valued the stock using Price to CF-based relative valuation method and have arrived at a target upside offering lower double-digit (in percentage terms). For the said purposes, we have considered We have taken peers like, Mosaic Co (NYSE: MOS), CF Industries Holdings Inc (NYSE: CF), Corteva Inc (NYSE: CTVA) etc. as a per group. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 50.77 on June 3, 2020.

NTR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Magna International Inc.

Magna International Inc. (TSX: MG) is an automotive supplier of products including exteriors, interiors, seating, roof systems, body and chassis, etc. The Company has 347 manufacturing operations and 94 product development, engineering and sales centres across 27 countries. 

Due to the ongoing COVID 19 crisis, the world economy took a pause, and the performance of the automobile and auto- ancillary manufacturers took a hit, due to a slump in demand across the globe. The Company derives its revenue from the major economies like North America, Europe and China and demand was considerably down across all the geographies for the first quarter of FY20.

The Company reported a quarterly dividend of USD 0.40 per common share, payable on June 05, 2020.

Q1FY20 Financial Highlights: MG declared its quarterly results, wherein the Company reported its sales at USD 8,657 million, down 18% on y-o-y basis. The decline was primarily attributable to a lower global light vehicle production and lower assembly volumes. The business was negatively impacted by global economic shut-down, loss of employment and impact on consumers’ wealth and disposable income coupled with lower consumer confidence. Income from operations before income taxes slump to USD 386 million from USD 1,368 million in Q1FY20. The sharp decline was primarily attributable to a lower income, higher depreciation and amortization expense, partially offset by a lower cost of goods sold, decrease in selling, general & administrative costs. Net income stood at USD 252 million, significantly lower than USD 1,101 million in pcp.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: Price to Cash Flow Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of MG stood resilient and generated a return of 4% in last one year and outperformed the index by 7%. The Group has a strong cash position of USD 1.26 billion and USD 3.1 billion of unused operating lines of credit, which is expected to meet its near-term working capital needs. The Company has the next maturity of its revolving credit facility in April 2021, which will further support the near-term cash flows. The Group is a renowned name in its segment and has tremendous market presence along with premium clientele. We expect a steady revival of demand as the economy stabilizes post easing of lockdown restrictions. We believe that all the negatives are priced in at current trading levels. The stock is trading above its 20-days and 50-days simple moving average (SMA) of CAD 54.99 and CAD 50.64, respectively, indicating a bullish pattern. The group is offering a decent dividend yield of 3.6%, which is attractive amid the lower interest rate environment. We have valued the stock using Price to Cash flow-based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have considered industry (Automobile & Parts) average on NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 61.24 on June 3, 2020.

MG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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