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 

• The bullish perspective on the management: Recently, the management shared its direction on numerous indispensable numbers mirroring their bullish view in 2021, where they anticipate Advanced Technology Solutions (ATS) segment income to increase by 10% in 2021 and margins in a range of 5% to 6%. However, they anticipate that total CCS segment revenue for 2021 would decline compared to 2020 and expect double-digit percentage revenue growth for Hardware Platform Solutions business in 2021 compared to 2020.

• Increased margins by improving the cost: The group has made ideal and reasonable changes in accordance with its business by improving expense and deals and cutting down different costs. Accordingly, the company enlisted improved segment income and margins from both segments on a quarterly as wells as on a yearly basis.

Source: Company

• Improving revenue concentration of Lifecycle Solutions: The Lifecycle Solutions portfolio revenue climbed 7% compared to Q1 2020, accounting for 59% of overall revenue, up from 51% in Q1 2020. Higher Lifecycle Solutions revenue concentration is enabling the company's long-term profitable expansion, which is a major plus.

Source: Company

• Healthy liquidity and reduced debts: Operating activities provide enough cash flow to finance the Company's expected growth strategy. The Company clocked USD 20.9 million of free cash flows and repaid USD 30.0 million of outstanding term loan borrowings in the reported period. Furthermore, the Company had USD 449 million in cash and USD 450 million in undrawn credit as of March 31, 2021. According to management, this liquidity would be adequate to keep the Company running well in the short term.

Source: Company

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 fall in revenue was primarily due to adverse demand impacts related to the COVID-19 pandemic, specifically in commercial aerospace and industrial businesses. The decreases were partially offset by revenue growth in HealthTech and Capital Equipment businesses.
• 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.
• EBT 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

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

Stock recommendation

The Company witnessed improved demand and revenue from its semiconductor Capital Equipment customers in Q1 2021 compared to Q1 2020, driven by strong demand, new program wins, and market share gains. The group expect semiconductor demand to remain strong in 2021, while the demand would accelerate towards the end of 2021 and into 2022 in its display business. Furthermore, the management would continue to take appropriate cost reduction and productivity actions to improve the overall performance and adjust their cost base to align with anticipated demand levels. Moreover, the management shared guidance on many important numbers reflecting their bullish view for 2021. Based on technical analysis, the stock has support at CAD 8.40 level. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating at the closing price of CAD 10.17 on May 14, 2021. We have considered Jabil Inc, TTM Technologies Inc, Flex Ltd, 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 or if the price closes below the support level.

1-Year Price Chart (as on May 14, 2021). Source: Refinitiv (Thomson Reuters)

Enerflex Ltd

Enerflex Ltd (TSX: EFX) engineers, designs, manufactures and provides aftermarket support for equipment, systems and turnkey facilities used to process and move natural gas from the wellhead to the pipeline.

Key highlights

• Rising global energy demand: Today, the global energy demand is satisfied by a diverse fuel mix, and natural gas is the world’s fastest-growing source of fossil fuel. Global natural gas consumption is projected to increase by over 40% from 2020 to 2050. We believe this scenario would benefit the company as it is in the business of providing services and turnkey facilities used to process and move natural gas from the wellhead to the pipeline.

Source: Company

• Improved gross margin: In Q1 2021, the company witnessed a higher gross margin in rental and aftermarket services segments to 63.8% and 24%, respectively V/s 62.4% and 22.6% in the previous corresponding period. However, the gross margin in engineered systems dropped to 14.7%.

Source: Company

• Positive free cash flow: The company has shown a healthy track record of clocking free cash flows. In Q1 2021, free cash flow increased to CAD 17.3 million compared to the negative free cash flows of CAD 16.4 million in the previous corresponding period. The rise in free cash flow was primarily due to reduced growth capital expenditures on the rental fleet and lower property, plant and equipment.

Source: Company

• Industry beating margins: Despite the hard time, the management’s solid determination helped them leaping the industry median margins on many fronts in Q1 2021, which is a key positive. The chart below gives a glimpse of this.

Source: Refinitiv (Thomson Reuters)

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the company reported lower revenues which stood at CAD 203.2 million, against CAD 365.7 million in the previous corresponding period.
• The operating income stood at CAD 7.0 million in Q1 2021, against CAD 50.2 million in pcp. The decline in operating income primarily due to reduced Engineered Systems revenue on lower bookings in recent periods, driven by uncertainty around commodity price and the ramifications of COVID-19.
• The company reported an EBT of CAD 1.5 million V/s CAD 44.0 million in pcp.
• On the back of lower interest expense and negative income tax, the company posted a net income of CAD 3.0 million, against CAD 37.4 million in pcp.

Risks associated with investment

The company caters to oil-producing companies, and due to uncertainty around commodity price stability and the ramifications of COVID-19, the companies have curtailed the capital investments. Continuation of such a trend would hamper the group’s performance.

Valuation Methodology (Illustrative): EV to Sales

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

Stock recommendation

Engineered Systems bookings totalled CAD 98.7 million, down from CAD 155.4 million in the same period last year. Although first-quarter bookings were healthier than cycle lows, bookings activity continued to be impacted by restrained spending within the oil and gas industry. The increase in backlog in the quarter is good news. And the company cautiously sees it as a strong signal of an inflection point in the market. Its pipeline of new opportunities is slowly improving both quality and quantity, but North American oil and gas operators continue to exhibit a cautious approach to growth capex. Moreover, it maintained its balance sheet strength by managing working capital and reducing debt. It reported bank-adjusted net debt to EBITDA ratio of 1.37:1, compared to a maximum ratio of 3:1. Based on technical analysis, the stock has support at CAD 6.40 level. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 7.84 on May 14, 2021. We have considered Mullen Group Ltd, CES Energy Solutions Corp and Ensign Energy Services Inc etc., as a peer group for comparison purpose.

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

1-Year Price Chart (as on May 14, 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.