Celestica Inc

Celestica Inc is a US-based electronic manufacturing service (EMS) company that 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 view of the management: Recently, the management shared its guidance on many vital numbers, which reflects their bullish view. In 2021, the management expect Advanced Technology Solutions (ATS) segment revenue to grow by 10% compared to 2020along with the margins in a range of 5% to 6%. Cloud Solutions (CCS) segment revenue is expected to decline in 2021 compared to 2020, primarily due to the disengagement from programs with Cisco Systems, Inc. The CCS segment margin is expected to be in a range of 2% to 3%. While the free cash flow for 2021, would be around USD 100 million. The expected numbers of Q1 2021 are summarized below.

Source: Company 

• Increased margins by improving cost of sales and other charges: The company has made timely and prudent adjustments to their business by improving cost and sales and bringing down the other expenses. As a result, the company clocked improved operating margins in Q4 2020 at 3.6%, compared to 2.9% for Q4 2019.

• Healthy liquidity: The Company generates sufficient cash flows from operating activities to fund its planned growth strategy. As on December 31, 2020, the Company had USD 464 million of cash and USD 450 million undrawn under its Credit Facility. The management believes this liquidity is sufficient to carry its operations smoothly in the near term. 

Financial overview of Q4 2020 (In millions of U.S. dollars)

Source: Company 

• In Q4 2020, the company reported a slight decline of 7% in revenue to USD 1.38 billion, compared to USD 1.49 billion in the previous corresponding period. The fall in revenue was primarily due to adverse demand impacts related to the COVID-19 pandemic, specifically in the group’s commercial aerospace and industrial businesses. The decreases were partially offset by revenue growth in HealthTech and Capital Equipment businesses.
• The company reported USD 113.8 million of gross profit in Q4 2020, compared to USD 101.8 million in Q4 2019. The improved cost of sales was the sole reason behind the high gross profit.
• EBIT stood at USD 26.4 million in Q4 2020, against USD (0.4) million in the previous corresponding period. Lower finance cost and lower other charges helped in upgrading the EBIT numbers.
• The company posted net income of USD 20.1 million in Q4 2020, against a loss of USD 7 million in Q4 2019. 

Risks 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 Earnings 

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

Stock recommendation

The Company witnessed improved demand from semiconductor Capital Equipment customers in Q4 2020, compared to Q4 2019 and expect the demand to remain strong in 2021. The group also anticipate strong demand growth in its display business. As per the management, they would continue to take appropriate cost reduction and productivity actions to improve the overall performance and adjust their cost base to better align with anticipated demand levels. Furthermore, the group is encouraged by the bookings momentum in its A&D business, with over half of the incremental bookings in 2020 came from new customers. The management also shared its guidance on many important numbers, which reflects their bullish view in 2021. Therefore, based on the above rationale and valuation, we have given a "Speculative Buy" rating at the closing price of CAD 11.17 on February 16, 2021. We have considered Flex Ltd, Jabil Inc, Sanmina Corp, etc. as the peer group for comparison.

Source: Refinitiv (Thomson Reuters)

Gamehost Inc

Gamehost Inc (TSX: GH) is operating in hospitality and gaming properties in Alberta, Canada. The company's reportable segments are strategic business units that offer different services like the Gaming segment which includes casinos offering slot, VLT, lottery and table games; Hotel segment includes hotels catering to mid-range clients and the Food and Beverage segment operations that are located within the casinos and hotels as a complement to other segments.

Key highlights 

• Expanding Business: The group is presently working on a 7,500 square foot expansion to gaming and non-gaming amenities at the Deerfoot Casino with expected completion in spring of 2021. Moreover, the group also reported that it received development permit approval from the AGLC and the Regional Municipality of Wood Buffalo for 6,400 square foot expansion of Boomtown Casino.

• Robust margins: Despite the ongoing sectorial weakness, the group has reported impressive EBITDA margin of 53.5% against the Industry median of 15.9% and operating margin of 40.6%, against the Industry median of 6.5% in Q3 2020, depicting improved operational efficiency. Furthermore, the group reported a net margin of 30.7% against an Industry median of 0.4%.

• Temporarily closed casinos: The Company has closed their all casinos in respect to the government's order to slow the pace of the growth of COVID-19. The Company's remaining hotel properties would remain open by appointment only. We hope this suspension soon would be taken off and the casinos would be operational again.

Financial overview of Q3 2020

Source: Company 

• In Q3 2020, the company reported operating revenues of CAD 10.1 million, against CAD 16.9 million in the previous corresponding period. The decline in revenue was primarily due to the ongoing closures of casinos due to COVID-19.
• Gross profit posted by the group stood at CAD 3.5 million in Q3 2020, against CAD 6.9 million in pcp.
• Profit from operating activities reported by the company in Q3 2020 stood at CAD 4.1 million, against CAD 5.9 million in Q3 2019. Lower revenue was the sole reason for drop in operating income.
• The company posted net income of CAD 3.1 million in the reported quarter against CAD 4.1 million in pcp. 

Risks associated with investment

The continued government restrictions on casinos closure would weigh on the group’s performance. 

Valuation Methodology (Illustrative): EV to Sales

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

Stock recommendation

Compared on a sequential basis, the company witnessed a commanding performance, registering a profit of CAD 3.1 million in Q3 2020, against a loss of CAD 1.6 million in Q2 2020. Furthermore, the group is commanding an Industry beating EBITDA margin, operating margin, and net margin reflecting the business's strength despite the weak scenario. The company is keeping itself busy expanding the business by working on a 7,500 square foot expansion to gaming and non-gaming amenities at the Deerfoot Casino with expected completion in spring of 2021. Moreover, the group also reported that it received development permit approval from the AGLC and the Regional Municipality of Wood Buffalo for 6,400 square foot expansion of Boomtown Casino. We believe this expansion would be beneficial for the company, as they would be generating more future revenue by entertaining more people. Therefore, based on the above rationale and valuation, we have given a "Speculative Buy" rating at the closing price of CAD 6.47 on February 16, 2021. We have considered Century Casinos Inc, Full House Resorts Inc, Gan Ltd, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

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