Exco Technologies Limited

Exco Technologies Limited (TSX: XTC) is a global designer, maker and producer of dies, moulds, components and assemblies, and consumable equipment for the diecast, extrusion and automotive segments.

Key Highlights:

• Balanced portfolio and bullish outlook: The company has a balanced portfolio, wherein 59% of the revenue is derived from automotive solutions, while rest the 41% comes from casting & extrusion. The management has a positive stance on the company’s upcoming performance and expects its revenue to grow at a CAGR of 10% till FY26. The company is introducing two new plants in Morocco and Mexico, which are expected to be operational from FY22 and FY23, respectively. The group also expects improved market share within the casting and extrusion segments, which would subsequently lead to organic growth for the firm in the coming years.
• Industry Leading margin: The company commands an improved margin compared to its peers, which indicates higher operational efficiencies. Notably, EBITDA margin and operating margin stood at 22.1% and 13.2%, respectively in Q3FY21, higher than the industry median of 11.9% and 7.9%, respectively. The company reported its net margin at 7.6%, significantly higher than the industry median of 4.7%.
• Favorable Macros: The company manufactures automobile components related to extrusion and diecast and has a leading market share within the segment. The above segment is correlated with the sales volume of light vehicle within the automobile industry. On the other hand, the North American light vehicle aluminum content segment has grown over the years, while the momentum is expected to remain favorable in the coming years, as consumers prefer light-weighting vehicles for fuel efficiency and lower emissions. The company has expertise in manufacturing complex aluminum components and associated tooling, while we believe XTC is highly poised to grab the upcoming opportunities arising from the industry.

Q3FY21 Financial Highlights:

• XTC announced its quarterly result, wherein the company posted a higher revenue of CAD 114.967 million, as compared to CAD 70.962 million in the previous corresponding period (pcp). The increase was driven by strong momentum from the automotive segment coupled with improved performance from the Casting and Extrusion segments.
• Total expenses stood at CAD 105.059 million, jumped from CAD 71.901 million in the previous corresponding period. The increase was primarily due to a rise in the cost of sales, increase in Selling, general and administrative expenses, partially offset by lower Depreciation and Amortization.
• The company reported a net income of CAD 8.682 million, as compared to a net loss of CAD 0.848 million in pcp.

Q3FY21 Income Statement highlights (Source: Company Report)

Risks:  Slowdown in automotive industry would affect the demand for the group’s offerings

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

In order to cater to the diversified customer base, the company has locations across the globe with 16 manufacturing locations in 7 countries and provides mix of highly innovative accessories and core parts as per the client’s requirements. Moreover, the stock carries a dividend yield of ~4.0%, which is impressive considering the current interest rate scenario. We have valued the stock using the P/E-based relative valuation method and have arrived at a single-digit (in percentage terms) upside. For the said purposes, we have considered industry (Automobiles & Auto Parts) median on NTM basis. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 10.12 on September 7, 2021.

One-Year Technical Price Chart (as on September 7, 2021). Source: REFINITIV, Analysis by Kalkine Group

5N Plus Inc.

5N Plus Inc. (TSX: VNP) is a Canada based company, which is engaged in the manufacturing of specialty metal and chemical products. The group operates through two segments Electronic Materials and Eco-Friendly Materials. The Electronic Materials segment manufactures and sells refined metals, compounds and alloys, which are primarily used in a number of electronic applications.

Key Highlights:

• Elevated revenue: In the recent quarters, the company reported a higher growth in topline supported by positive demand dynamics. Notably, the company reported the highest revenue during Q2FY21 in the last five quarters.

Source: Company Presentation

• Improving backlog: The company reported constant growth in backlog, which indicates a sign of revival due to increase demand dynamics. At the end of Q2FY21, backlog represented 199 days of annualized revenue, which is higher than Q1FY21. Notably, backlog stood highest in the last four quarters, which is a positive indication. During the second quarter of FY21, bookings reached 99 days, jumped from 66 days in the same period last year.

Q2FY21 Financial Highlights:

• VNP announced its quarterly result, wherein the company posted revenue of USD 47.719 million, higher than USD 41.136 million in pcp. The increase was driven by higher income from Eco‐Friendly Materials (USD 28.501 million vs USD 21.618 million in pcp).
• The group reported higher cost of sales, increase in Selling, general and administrative expenses, partially offset by lower other expenses.
• Operating earnings stood at USD 4.075 million, as compared to USD 4.137 million in pcp.
• Net Earnings stood higher at USD 2.159 million, as compared to USD 1.749 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Reports)

Risks: The company reported a higher cost of sales and an increase in selling, general & administrative expenses, in both Q2FY21 and H1FY21. Continuation of the above trend would dampen the company’s margins and cash flows.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

Within the Eco‐Friendly Materials, the group reported positive impacts from its recent investments in process technology and asset optimization. The company would continue to increase operational efficiencies and selectively position its business development strategies, which would further emphasize on higher value‐added products with higher margins. The above is expected to support the company’s upcoming margins and cash flows, which is a key positive. The company reported a decline in long-term debt at USD 45 million in Q2FY21 from USD 50 million in Q4FY20. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a single-digit upside (in percentage terms). Considering the aforesaid facts, we give a ‘Hold’ rating on the stock at the closing price of CAD 3.19 on September 7, 2021.

One-Year Technical Price Chart (as on September 7, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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.