Linamar Corporation

Linamar Corporation (TSX: LNR) is engaged in the manufacturing of powertrains and drivelines for vehicle and power generation markets and operates under two business segments, namely, Transportation and Industrial. Within the Transportation segment, the company develops and manufactures precision metallic components, modules and systems used in vehicles and power generation machines. The Industrial segment is focused on mobile industrial equipment, including aerial work platforms and telehandlers.

Key Highlights:

• Strategic alliance with Ballard Power Systems: Recently, the company collaborated with Ballard Power Systems, wherein the group would develop and sell fuel cell powertrains and components for class 1 and 2 vehicles, weighing up to 5-tons, primarily across North America and Europe.

• Significant Reduction in debt leads to improved financial flexibility: The company has constantly reduced its total debt in the recent past, which is a key positive. Notably, at the end of Q1FY21 total debt reduced by ~24% to CAD 980.829 million from CAD 1,303.214 million in FY20. The company’s net debt to EBITDA stood at 0.31x at the end of Q1FY21, lowered from 0.50x in FY20. A reduction in the net debt to EBITDA is a positive sign and indicates higher financial flexibility.                

Snapshot of Net Debt to EBITDA (Source: Company Presentation)

• Increase in Content Per Vehicle (CPV): In the recent past, the company showed an increase in Content Per Vehicle (CPV), which is an indicator of the group’s market share across the automotive markets in which it operates. A higher CPV is desirable as it indicates a higher demand scenario. Due to increased market share, CPV has grown meaningfully across the North America and Asia Pacific region during Q1FY21.           

Snapshot of Content Per Vehicle (Source: Company Presentation) 

Q1FY21 Financial Highlights:

• LNR declared its quarterly results, wherein the corporation posted sales of CAD 1,781.857 million, up 15% on y-o-y basis. The increase was driven by the strong performance from the automobile sector across Asia and North America.
• The company reported a higher Normalized EBITDA of CAD 341.3 million, which soared 59.6% over Q1FY20. The growth was supported by better volumes and margins from the new launches coupled with several cost saving initiatives strategies taken during the period, which has resulted in lower selling, general and administrative costs (CAD 91.520 million v/s CAD 97.441 million in pcp).
• Net earnings stood higher at CAD 153.532 million compared to CAD 78.486 million in the previous corresponding period (pcp).
• Cash and cash equivalents stood at CAD 671.902 million at the end of Q1FY21, while total assets were recorded at CAD 7,328.988 million.

Q1FY21 Income Statement Highlight (Source: Company Report)

Risks: Demand for the company’s products are correlated to global automobile sales, and a slowdown in automobile sector might hinder the company’s order book, cash flow and margins.

Valuation Methodology (Illustrative): P/E based valuation.

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

Stock Recommendation:

The management has guided for a double-digit sales growth in FY21 supported by improved industrial performance coupled with expected solid traction from the new launch categories. EPS and EBITDA for FY21 are expected to grow in double digits over FY 20, while the company expects strong free cash flows in FY21 supported by improved product mix and cost-efficiencies. LNR is marking its presence across new segments like next generation battery electric vehicles, 10-speed transmission segment from major Japanese OEM, light vehicle cylinder head and block etc., which are expected to support the company’s upcoming operations. We have valued the stock using the P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Automobiles and Auto Parts) median on NTM basis. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 74.91 on May 13, 2021.

One-Year Price Chart (as on May 13, 2021). Source: Refinitiv (Thomson Reuters)

Gibson Energy Inc.

Gibson Energy Inc. (TSX: GEI) is a Canada-based integrated service provider to the oil and gas industry with operations across producing regions throughout North America. The Company is engaged in the movement, storage, blending, processing, marketing and distribution of crude oil, condensate, natural gas liquids (NGLs), water, oilfield waste and refined products.

Key highlights

• An Income Play:The group continued with a track record of dividend distribution and declared a quarterly dividend of CAD 0.35 per common share, payable on July 16, 2021. Moreover, at the last closing price, the stock was offering a dividend yield of 6.04%, which is lucrative considering the current interest rate environment.

Source: Refinitiv (Thomson Reuters)

• Improving distributable cash flows: Despite the turbulent year of 2020, the company's agile management and operating performance allowed it to post a healthy sequential improvement in distributable cash flows to CAD 64 million, up from CAD 54 million in the previous quarter.

Source: Company

• Robust financial position: The company maintained a strong financial position, with Net Debt to Pro Forma Adjusted EBITDA on March 31, 2021 of 3.1x, within the Company’s 3.0x – 3.5x target range and the company remain fully-funded for all sanctioned capital.

Financial overview of Q1 2021 (Amounts in thousands of Canadian dollars)

Source: Company

• In Q1 2021, the company reported an increase in revenue by CAD 151 million or 10.0% to CAD 1,609.7 million, compared to CAD 1,458.6 million in the previous corresponding period. The rise in revenues were primarily due to higher volumes and commodity prices from the Marketing Segment.
• The reported period's gross profit stood at CAD 72.6 million against CAD 100.5 million in pcp. The decrease in gross profit was mainly due to higher cost of sales, which increased to 95.5% v/s 93.1% in the previous corresponding period.
• On the back of slightly higher G&A expenses, the company posted operating income of CAD 55.8 million compared to CAD 86.6 million in Q1 2020.
• The company reported a net income of CAD 32.7 million, against CAD 50 million in the pcp. An increase in cost of sales was the main reason behind lower net income, which was partly offset by lower income tax expense. 

Risks associated with investment

The company is exposed to many risk factors which alone or in a cumulative manner can affect the company’s operations and financial health. Some of the risks include the lower demand for crude oil and natural gas, lower production, prices of these commodities as the low realization prices will dampen their top line, inflation, interest rates etc. 

Valuation Methodology (Illustrative): EV to Sales 

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

Stock recommendation

FY 2021 began with a solid start, where the company’s Infrastructure segment performed in line with the expected run-rate and Marketing segment slightly above the initial outlook, which is notable. Recently, the company entered into a long-term agreement with Suncor Energy Inc. for services at its Edmonton Terminal and sanctioned the related Biofuels Blending Project on a fixed-fee basis and a 25-year term to facilitate the storage, blending and transportation of renewable diesel. On top of this, from the long-term investor’s perspective, the stock offers a dividend yield of 6.040%, which is lucrative amid a low-interest-rate environment. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stock at the closing price of CAD 23.18 as on May 13, 2021. We have considered Cenovus Energy Inc, Imperial Oil Ltd etc. as the peer group for comparison.

1-Year Price Chart (as on May 13, 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.