Ritchie Bros. Auctioneer

Ritchie Bros. Auctioneer (TSX: RBA) started its operations in 1958 as a live auctioneer of industrial equipment; it has greatly expanded its operations to include the sale of construction, agricultural, oilfield, and transportation equipment in a variety of venues.

Key highlights

• Healthy Consolidated Performance: Despite the headwinds, the company saw a decisive contribution to Gross Transaction Value (GTV) growth across all geographic regions and channels and demonstrated the growth in the fourth quarter; where GTV increased by 5%, Adjusted operating income grew by 16%, and Adjusted EPS registered a respectable growth of 11%. GTV increased 5% to USD 5.4 billion as compared to 2019.

Source: Company

• Consistent Operating Free Cash Flows:The resiliency of the business along with agile management and operational efficiency helped the group in generating operating free cash flows of USD 231 million in Q4 2020. Although on the sequential basis, the group reported decline in free cash flows; but viewing the headwinds and macros the group kept themselves on the positive territory, which is applaudable.

Source: Company

Decent liquidity: As of December 31, 2020, the group held a solid balance sheet and a strong liquidity position. It had USD 278.8 million of unrestricted cash and USD 455.1 million of unused committed capacity under its long-term revolving credit facilities. On August 14, 2020, the group successfully amended and extended its credit facilities totaling USD 630.0 million to expire in October 2023.

Event update: The company would release its Q1 2021, financial results on May 10, 2021.

Financial overview of FY2020 (In thousands of USD)

Source: Company

• Total revenue in FY 2020 increased 4% to USD 1,377.26 million, compared to USD 1,318.64 million in FY 2019. The rise in revenue was primarily due to strong executions, which helped in generating higher GTV across all territories.  Service revenue increased 8% to USD 871.5 million, compared to USD 804 million in FY 2019. Inventory sales revenue decreased 2% to USD 505.6 million, compared to USD 514.6 million in FY 2019.
• Total Operating expenses posted by the company increased 2% to USD 1,114.1 million, compared to USD 1,095.4 million in the previous corresponding period. The rise was primarily due to higher SG&A expenses in the reported period.
• Operating income increased 18% to USD 263.1 million, compared to USD 223.2 million in pcp. The reason behind increased operating income is purely rising revenue.
• Net income increased to USD 170.3 million, compared to USD 149.1 million in FY 2019. Net income rose primarily due to the higher operating income, lower interest expense, and partially offset by the increase in the effective tax rate. 

Risks associated with investment

Because of COVID-19 pandemic and social distancing restrictions, the company cancelled few live auctions in the recent past, any further outbreak or prolonged measures might lead to further cancellation of such events. Any such scenario may hamper financial performance of the company. 

Valuation Methodology (Illustrative): Price to Earnings 

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

Stock recommendation

Amidst the current economic cycle, wherein most of the sectors witnessed a decline in the financials due to weak consumer sentiment, the company has reported growth in operating numbers and has maintained its overall performance, which is commendable. Furthermore, 100% of transactions have been moved online; thus, the Company would continue to leverage all the tools in its digital and technology toolbox. We believe this could attract a more significant number of customers and increasing the GTV; hence, the Company would recognize more revenue. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing price of CAD 78.19 on April 30, 2021. We have considered IAA Inc, WSP Global Inc, Boyd Group Services Inc, etc. as the peer group for the comparison.

One-Year Price Chart (as on April 30, 2021). Source: Refinitiv (Thomson Reuters)

Finning International Inc.

Finning International Inc. (TSX: FTT) is a dealer and distributor of heavy-duty machinery and parts and operates through the Caterpillar brand. FTT sells and rents Caterpillar machinery to the mining, construction, petroleum, forestry, and power system application industries.

Key Updates:

• Balanced Portfolio: The company’s income does not depend on a particular geography, line of business or market segments, which is a key positive as it minimizes the risk of dependence on a particular segment. The majority of the FY20 revenue was derived from Canada (~51%), while South America constitutes almost 33%, followed by 16% contribution from the UK & Ireland.

Segment Bifurcation (Source: Company Presentation)

• Improving Financials from Prudent Strategies: The company has reported improved financial metrics in the recent past, supported by its focus on several cost improvement methods and better value proposition to its consumers with the help of digital capabilities. Through its Extensive machine learnings and data-driven decision mechanism, the company tracked the changing customer preferences and offered products as per their requirements, which has led to higher customer satisfaction and eventually improved demand dynamics. Notably, the company recorded an elevated free cash flows and reduction in net debt to adjusted EBITDA in 2020.

Source: Company Presentation

• Event Update: The company would disclose its Q1FY21 result on May 11, 2021. 

FY20 Financial Highlights:

• FTT announced its full-year result, wherein the company reported revenue of CAD 6,196 million, reflecting a 21% y-o-y decline over the previous year (FY19). The decline was primarily attributed to a tepid demand scenario due to restrictions imposed across the regions where the company operates, which led to reduced activity from all the sectors.
• Gross profit stood lower at CAD 1,570 million, as compared to CAD 1,799 million in FY19.
• The quarter was marked by a lower SG&A expense (CAD 1,245 million, v/s CAD 1,360 million in FY19). The group witnessed a 3% y-o-y decline in EBITDA at CAD 700 million, while EBITDA the margin improved to 12.1%, from 9.9% in FY19.
• Despite lower revenue, the company posted decent net income of CAD 232 million, as compared to CAD 242 million in FY19. The increase was partially supported by a lower finance cost (CAD 85 million v/s CAD 107 million in FY19), due to a decline in total debt (CAD 1,199 million v/s CAD 1,544 million in FY19).

FY20 Income Statement Highlights (Source: Company Report)

Risk: The company may witness lower demand across the industrial and mining industries, if the restrictions are imposed for an extended period of time. This might lead to a lower income and a slide in the order book.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

For FY21, the company expects recovery in Chilie and UK market, which is expected to drive its intake and backlog. Moreover, the company also expect an annual cost savings of more than CAD 100 million, which would support the company’s earnings and margins. EBITDA to FCF conversion is expected to be below 50% due to increased inventory purchases. The group has also improved its supply chain management through data-driven sales and operational planning tools, which has resulted in higher demand visibility, which is a key positive. We have valued the stock using the Price to 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 Toromont Industries Ltd, Cervus Equipment Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of FTT at the last closing price of CAD 31.99 on April 30, 2021.

One-Year Price Chart (as on April 30, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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