Celestica Inc

Celestica Inc (TSX: CLS) is a US-based electronic manufacturing service (EMS) company which provides a range of services from design, engineering, and assembly to testing and reverse logistics. The group has two operating segments, namely, Advanced Technology Solutions (ATS) and Connectivity and Cloud Solutions (CCS).

Key Highlights 

• Increased margins through lowering sales costs and other expenses: By improving expense and deals and reducing various expenses, the group has achieved ideal and acceptable modifications in line with its business goal. As a result, the firm has improved segment income and margins from both segments on a quarterly and annual basis.

Source: Company

• Optimistic outlook: ATS segment income is anticipated to expand by 10% in 2021 compared to 2020, with margins in the range of 5% to 6%, and Capital Equipment sales are likely to surpass USD 700 million, indicating a more than 30% increase over 2020, with a margin range of 5% to 6%, according to management. However, revenue for the CCS segment is expected to drop in 2021 compared to 2020, while revenue for the Hardware Platform Solutions division is expected to rise by double digits in 2021 compared to 2020.

• Strong industry expansion: The Wafer Fabrication Equipment (WFE) market is expected to reach USD 86 billion by 2024, with a CAGR of 9%, while the OLED and Mini LED display markets are projected to reach USD 64 billion and USD 63 billion, respectively, by 2025, with a combined CAGR of 27%, driving display equipment spending higher. To take advantage of this opportunity, the firm has developed extensive vertical capabilities and a strategic global platform to serve the world's leading original equipment manufacturers (OEMs) in the WFE and Display equipment sectors.

Financial overview of Q1 2021 (in millions of U.S. dollars)

Source: Company

• In Q1 2021, the company reported a slight decline of 6% in revenue to USD 1,234.9 million, compared to USD 1,318.6 million in the previous corresponding period.
• The company reported USD 101.5 million of gross profit in Q1 2021, compared to USD 91.0 million in Q1 2020. The improved cost of sales was the sole reason behind the high gross profit.
• In the reported period earnings before income tax increased to USD 15.7 million, against USD 2.3 million in the previous corresponding period. The lower finance cost and lower other charges helped in upgrading the EBIT numbers.
• The company posted a net income of USD 10.5 million in the reported period, against a loss of USD 3.2 million in pcp.
  

Risk associated with investment

The IT and related services are prone to price competition, due to the emergence of several players within the industry, which might dampen the company’s margin in the foreseeable future.

Valuation Methodology (Illustrative): Price to Cash Flow

*1USD=1.25CAD

Stock recommendation

Strong demand, new program wins, and market share gains drove higher demand and revenue from the Company's semiconductor Capital Equipment customers in Q1 2021 compared to Q1 2020. The company expects semiconductor demand to continue to be robust in 2021, with demand in its display sector picking up towards the end of 2021 and into 2022. In addition, management would continue to implement necessary cost-cutting and productivity initiatives in order to enhance overall performance and adapt their cost base to match expected demand levels. Furthermore, it provided advice on a number of key figures, indicating its positive outlook for 2021. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 9.50 on July 14, 2021. We have considered Jabil Inc, TTM Technologies Inc, etc., as the peer group for comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. 

Technical Analysis Summary 

One-Year Technical Price Chart (as on July 14, 2021). Source: REFINITIV, Analysis by Kalkine Group

Chorus Aviation Inc

Chorus Aviation Inc. (TSX: CHR) is a Canada-based company that provides regional aviation solutions and offers a range of regional aviation support services. 

Key highlights

• Increased leasing revenue: The company clocked an increase in aircraft leasing revenue under the CPA of CAD 2.5 million due to nine incremental CRJ900s partially offset by removing the Dash 8-300s and a lower US dollar exchange rate. Moreover, it collected approximately 62% of its lease revenue billed in the first quarter of 2021. In April 2021, it also executed leases for two Dash 8-400s with Sky Alps, with deliveries expected in the second quarter of 2021, which would boost the revenue further.

• Venturing into cargo market: The company is very thrilled to add cargo contract flying to its capabilities. The group sees the cargo business as a growth potential that will benefit from the success of e-commerce, and it is excited to be a part of it. This initiative, we feel, has the potential to offer up new avenues for additional cash flows.

• Improving Industrial scenarios: The industry has started experiencing some encouraging signs of renewed travel demand, particularly in regional and short-haul markets. It was evident by the group’s recent long-term lease agreements with two new leasing customers, Sky Alps of Italy and Cobham Aviation Services of Australia.

• Stable liquidity and minimizing debts: The company expects its liquidity to be relatively stable by the end of 2021 as it continues with measures to manage liquidity. On March 31, 2021, total liquidity stood at CAD 171.3 million, including cash of CAD 136.0 million and CAD 35.3 million of available room on its operating credit facility. Furthermore, it made a repayment of its debt amounting to CAD 56.0 million, which is admirable.

• Event update: The company will present its second quarter FY 2021, financial results on Thursday, August 12, 2021.

Financial overview of Q1 2021 (expressed in thousands of CAD)

Source: Company

• In Q1 2021, the group reported its operating revenue of CAD 202.4 million, which decreased 42.1% compared to CAD 349.9 million in the previous corresponding period. Decreased revenue in the RAS segment was attributable to the decline in Controllable Revenue, Pass-Through Revenue. 
• Total operating expenses in Q1 2021 fell to CAD 239.3 million, compared to CAD 303.2 million in Q1 2020, primarily due to lower salaries, decreased aircraft, along with lower airport and navigation fees, partially offset by higher depreciation cost.
• Operating loss for the reported period stood at CAD 36.8 million, against a profit of CAD 46.6 million in the previous corresponding period.
• The company's net loss increased to CAD 38.0 million in the reported quarter, against CAD 17.2 million, primarily due to the above-stated reasons, partially offset by income tax recovery.  
  

Risks associated with investment

Further extension of restrictive measures to contain Covid-19 pandemic would dampen the group’s performance. The company may witness a headwind from lower passenger footfalls. 

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

The COVID-19 pandemic and government sanctions have posed unparalleled obstacles for the passenger aviation industry worldwide. Still, the organization is excited by the development of various COVID-19 vaccinations and anticipates that flying volume would steadily increase, allowing them to generate more revenue. Furthermore, the company is planning to enter the cargo contract flying space as it seeks growth opportunities due to the rise in eCommerce, and we believe this would provide fresh cash flows. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 4.52 as of July 14, 2021. We have considered SkyWest Inc, Spirit Airlines Inc, etc., as the peer group for comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on July 14, 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.