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.

Key Highlights:

• Recovery in Light Vehicles Sales: The light vehicle segment revived from the drastic fall recorded during the first half of FY20, while the recent trend suggests an improved demand dynamic from the US and China. In FY21, Sales from the U.S. and China, is anticipated to grow by 11% and 6% on y-o-y basis, to 16.1 million and 25.1 million, respectively. Also, the demand from Europe recovered during the second half of FY20, which is a key positive too.          

Source: Company Presentation

• Reduction in total debt: At the end of FY20, total debt reduced to CAD 1,303.214 million, from CAD 1,897.689 million in FY19, reflecting a decline of 31.3%. A lower debt has led to a decline in finance costs, which has supported the company’s bottom line. Moreover, it enhances the overall financial flexibility of the firm.
• Encouraging Production Profile: The management is optimistic for Global LV Auto Market demand. In Q1FY21, the company’s Global LV Auto production is expected to grow by 10.3% or 1.8 million units on y-o-y basis. Meanwhile, for FY21, the company expects its production to improve by 9.5 million units, reflecting 12.7% y-o-y growth.

Estimated production (Source: Company Presentation)

Q4FY20 Financial Highlights:

• LNR announced its quarterly results, wherein the group posted sales of CAD 1,704.845 million, as compared to CAD 1,616.060 million in the previous corresponding period (pcp). The increase was driven by strong growth from the Transportation segment (CAD 1,389.2 million v/s CAD 1,280.2 million in pcp).
• The company reported an elevated EBITDA of CAD 304.5 million v/s CAD 222.4 million in pcp, supported by strong EBITDA growth from the Transportation segment (CAD 234.1 million, up 58.4% on y-o-y basis).
• Net earnings stood higher at CAD 113.080 million, significantly higher than CAD 49.714 million in the previous corresponding period.
• Cash and cash equivalents stood at CAD 861.100 million at the end of FY20, while total assets were reported at CAD 7,556.690 million.

Q4FY20 Income Statement Highlights (Source: Company Reports)

Risks: Reduction in demand of the company’s products due to a substantial reduction in volume from automotive and industrial products might lead to a tepid performance, which might further impact the cash flow and margins of the company.

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

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

Stock Recommendation:

Within the industrial segment, access equipment market is showing signs of recovery, while NA Aerial Work Platform (AWP) and EMEA AWP markets are expected to up by 21% and 22% on y-o-y basis in FY21. Talking about the Agriculture market, the industry witnessed a rally in the commodity markets, while improved farm net income is likely to support retail sales. Notably, North America’s combine retail sales went up 28% on YTD basis till Feb 2021.

Source: Company Presentation

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 closing market price of CAD 74.23 on April 16, 2021.

One-Year Price Chart (as on April 16, 2021). Source: Refinitiv (Thomson Reuters)

Morneau Shepell Inc.

Morneau Shepell Inc. (TSX: MSI) is a human resources company that provides services like well-being, administrative outsourcing, consulting, and absence management. 

Key Updates:

• Sale of Consulting Segment: The company made a prudent decision by selling its consulting business to HUB International Limited at a price consideration of CAD 70.0 million. The management is focusing on improving its working capital management by exiting its consulting business, which had higher input costs. Moreover, with the proceeds, the company is focused to retain the market position by investing in technology and accelerating growth through geographic expansion.
• Robust Cash Flow Generation: In FY20, the company reported strong growth in cash from operations at CAD 153.925 million, v/s CAD 92.233 million in FY19, supported by higher net income. Moreover, free cash flow stood higher at CAD 80.239 million from CAD 39.181 million in FY19.
• Stable Dividend payment amidst turbulent times: For FY20, the company distributed a higher dividend of CAD 53.214 million v/s CAD 50.302 million in FY19, which is impressive.
• Event Update: The group would disclose its first quarter FY20 result on May 13, 2021.

FY20 Financial Highlights:

• MSI declared its full-year results and posted operating revenue of CAD 979.162 million, which grew 10.2% over FY19. The growth was driven by the acquisition of Mercer coupled with strong organic growth in the U.S and International regions.
• Total operating expense stood at CAD 922.678 million as compared to CAD 829.207 million in the previous year. The increase was primarily due to higher salaries, benefits and contractor costs (CAD 668.260 million v/s CAD 599.467 million in FY19), increase in depreciation and amortization (CAD 108.714 million v/s CAD 94.138 million in FY19) coupled with the inclusion of Sublease loss provision amounting to CAD 10.300 million.
• The group reported profit before income taxes at CAD 70.378 million, as compared to CAD 28.466 million in FY19.
• The company posted a net profit of CAD 55.924 million, against a net profit of CAD 18.968 million in the previous year.

Income Statement Highlights (Source: Company Report)

Risks:

The company operates in a highly competitive market, and hence to remain afloat within the industry, the company must adopt and compete with the rapid changes in technology, industry standards and client preferences. This might lead to higher input cost, which might impact the margin.

Valuation Methodology (Illustrative): EV to Sales

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

Stock Recommendation:

For FY20 Adjusted EBITDA grew CAD 200.025 million, from CAD 182.453 million in FY19, while EBITDA margin stood higher at 21.1% in FY20 v/s 17.4% in FY19. The company reduced its total long-term debt from CAD 470.456 million in FY19 to CAD 411.924 million in FY20, which is a key positive and augurs well for improve financial flexibility. Meanwhile, the acquisition of Mercer has resulted in improved market share. We have valued the stock using the EV/Sales based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like TMX Group Ltd, AGF Management Ltd and Home Capital Group Inc etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 31.60 on April 16, 2021.

One-Year Price Chart (as on April 16, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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