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 administration: 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 clocking margins in a range of 5% to 6%. Cloud Solutions (CCS) segment income is relied upon to decrease in 2021, essentially because of the separation from programs with Cisco Systems, Inc. The CCS segment's margin is relied upon to be in a range of 2% to 3%. While the free cash flow would be around USD 100 million. The expected numbers of Q1 2021 are summed up beneath.

Source: Company 

• Increased margins by improving cost of sales and other charges: 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 the segments on quarterly as wells as on yearly basis.

Source: Company

• Healthy liquidity: The company’s operations provide enough cash flow to finance the expected growth strategy. The Company had USD 464 million in cash and USD 450 million undrawn credit as of December 31, 2020. This liquidity, according to management, is adequate to keep the company running well in the short term.

Source: Company 

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

Source: Company 

• In Q4 2020, the company reported a slight decline by 7% in revenue to USD 1,387 million compared to USD 1,492 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 113.8 million of gross profit in Q4 2020, compared to USD 101.8 million in Q4 2019. The decreased 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. 

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 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, the group continue to take appropriate cost reduction and productivity actions to improve the overall performance and adjust the cost base to better align with anticipated demand levels. Furthermore, the group is encouraged by the bookings’ momentum in the A&D business, with over half of the incremental bookings in 2020 came from new customers. The administration also shared its guidance on many important numbers, which reflects their bullish view for 2021. Therefore, based on the above rationale and valuation, we suggest a "Speculative Buy" recommendation at the closing price of CAD 10.18 on April 21, 2021. We have considered Jabil Inc, Sanmina Corp, Flex Ltd, etc. as the peer group for comparison.

1-Year Price Chart (as on April 21, 2021). Source: Refinitiv (Thomson Reuters)

H2O Innovation Inc.

H2O Innovation Inc. (TSXV: HEO) is a Canada-based company, which provides water treatment solutions based on membrane filtration technology. The end users are municipal corporations, energy, and natural resources etc.

Key Updates:

• Capacity addition of 40%: Recently, the company announced its capacity expansion through the installation of a new manufacturing plant in Ham-Nord (Quebec). The new addition would increase its existing capacity by 40% and would likely support the company’s water treatment segment through improved productivity, enhanced inventory management and providing better working conditions for its employees. 

• Constant Increase in Recurring Revenue: The company’s operations have accelerated in the recent past, well supported by regular income from WTS, Specialty Products and O&M segments, which is a key positive. Moreover, consistent growth in the recurring revenues improved the company’s risk profile as well.                  

Source: Company Presentation

• Improved Financials: During the last decade, HEO reported glaring progress in its financials, supported by strong momentum from the Operations & Maintenance (O&M) segment since 2017. Notably, the above segment contributed almost 50% of the current revenue, while income from other segments also improved during the period (2010 to 2020), which is a key positive.               

Source: Company Presentation

Q2FY21 Financial Highlights:

• HEO announced its quarterly result, wherein the company posted revenue of CAD 35.0 million, v/s CAD 33.3 million in the previous corresponding period (pcp).
• Adjusted EBITDA was higher at CAD 3.6 million, from CAD 2.3 million in pcp. The increase was driven by improved business mix, higher sales from Genesys distributors and increased end-users in Latin America.
• Adjusted EBITDA margin grew remarkably at 10.2%, as compares to 6.9% in pcp, supported by lower selling general and administrative expenses.
• The company’s net earnings were reported at CAD 0.3 million, as compared to a net loss of CAD 0.9 million in pcp.

Q2 FY21 Income Statement Highlights (Source: Company Reports)

Risks: The operations of the company might be impacted by a change in technology, entry of new players with value-added products at a competitive price leading to price competition, erosion of margins etc.

Valuation Methodology (Illustrative): EV to EBITDA based

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

Stock Recommendation:

The company is focusing on its three-year growth objectives, wherein adjusted EBITDA is targeted above 11.0% in FY23, from 9.4% in FY20. The company is working on improving its sales by organic growth and through acquisitions and would invest in improved marketing techniques to obtain higher customer satisfaction. Moreover, the company is working on improving its operational efficiency through product innovation, use of data, and best available digital tools to eliminates extra costs, which augurs well for margin expansion. Notably, the company’s net debt stood at CAD 14.1 million at the end of Q2FY21, lower than CAD 18.0 million in Q2FY20. The above would likely to improve the company’s financial flexibility. We have valued the stock using the EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have industry (Water &Related Utilities) median on NTM basis. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the last closing price of CAD 2.36 on April 21, 2021.

One-Year Price Chart (as on April 21, 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.