Celestica Inc. 

Celestica Inc. (TSX: CLS) is a US-based electronic manufacturing service (EMS) company that offers a variety of services starting from design, engineering, and assembly to testing and reverse logistics.

Key Updates:

• Reduction in Debt: The company has successfully reduced its total debt to USD 585.9 million in FY20, as compared to USD 698.7 million in FY19, which is commendable. Moreover, a lower debt has resulted in a lower finance costs (USD 37.7 million versus USD 49.5 million in FY19), which has partially supported the company’s bottom line. Moreover, a lower debt component also provides higher financial flexibility.

• Better Product offerings through Joint Design & Manufacturing (JDM) Evolution: The group witnessed strong traction from Joint Design & Manufacturing (JDM) operations, which grew 53% on y-o-y basis in Q4FY20. The above product offers High-quality design, manufacturing services synchronized through a cloud platform and results in lower R&D & SCM Cost for the company’s clients. The above product offers a flexible, collaborative engagement model and is focusing on accelerated design cycle time, improving time to GA by leveraging Celestica IP.

FY20 Financial Highlights:

• CLS announced its full-year result, wherein the company posted revenue of USD 5,748.1 million, lower than USD 5,888.3 million in FY19. The decline was primarily attributable to lower revenue from ATS segment (USD 2,086.3 million versus USD 2,285.6 million in FY19), partially supported by an improved performance from CCS segment (USD 3,661.8 million versus USD 3,602.7 million in FY19).
• Gross profit stood at USD 437.6 million, higher than USD 384.7 million in FY19, thanks to the higher revenue and a lower cost of sales (USD 5,310.5 million versus USD 5,503.6 million in FY19).
• The group witnessed slightly higher selling, general and administrative expenses (USD 230.7 million versus USD 227.3 million in FY19) and lower amortization of intangible assets (USD 25.6 million versus USD 29.6 million FY19).
• Net earnings stood at USD 60.6 million, lower than USD 70.3 million in the previous year.
• The group reported cash and cash equivalents of USD 463.8 million, while total assets stood at USD 3,664.1 million.

FY20 Income Statement Highlights (Source: Company Report)

Risks: 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: Price to Earnings Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

In the recent past, the group witnessed solid growth from the JDM segment, while the management expects the momentum to continue in the coming quarters as well. Moreover, the above service is aligned with the company’s investments with ecosystem partners, ensuring roadmap supported customer requirements, which is a key positive. The group intends to deliver design and manufacturing flexibility and performance, providing next-generation technology to market by providing accelerated design cycle time, improving time to GA by leveraging the company’s IP. Moreover, the group would provide leading-edge, high bandwidth switch using on-board optics. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Flex Ltd, Jabil Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 10.86 on March 16, 2021.

One-Year Price Chart (as on March 16, 2021). Source: Refinitiv (Thomson Reuters)

Medipharm Labs Corp.

Medipharm Labs Corp. (TSX: LABS), is a Canada-based medicinal cannabis company specializing in the pharmaceutical grade production of cannabis. The Company is focused on distillation and cannabinoid isolation and purification.

Key highlights

• Makes an entry into a new market:Recently, the company expanded its distribution revenue footprint in Canada by entering the growing Quebec market through a new supply agreement with the Société Quebecois Du Cannabis (“SQDC”). The company would supply various cannabis concentrate-based products from its growing portfolio in the growing medical and wellness market in Quebec. 

• Launching new “OTC” products:Recently, the company’s wholly-owned subsidiary, MediPharm Labs Australia Pty Ltd., entered into a new GMP white-label supply and contract manufacturing agreement with Cannim Australia Pty Ltd (“Cannim”) to launch the next generations over-the-counter (“OTC”) products in Australia in 2021. Under this three-year agreement, the company would supply a full range of specially formulated CBD and THC cannabis oil products that would be sold initially under Cannim’s Lumir brand. The company would also provide Cannim with contract manufacturing with its starting material. 

• Raising Funds:Recently, the Company closed its previously announced “bought deal” offering of units for total gross proceeds of CAD 33.35 million, where it sold 57.5 million units at a price of CAD 0.58 per Unit. Each Unit comprises one common share in the Company's capital and one Share purchase warrant, which shall be exercisable to acquire one share at an exercise price of CAD 0.70 per share for 24 months from the date hereof. The proceeds intended to fund the growth of its Cannabis 2.0 product portfolio, expand medical products and Active Pharmaceutical Ingredient portfolio for export.

Financial overview of Q3 2020

Source: Company 

• In Q3 2020 the company posted Revenue of CAD 4.9 million, compared to CAD 43.3 million in Q2 2019 due to a reduction in the average selling price and volume of bulk extracts sold during these periods, which was partially offset by growing sales of consumer-packaged goods to provincial distributors throughout Canada.

• Gross loss of CAD 10.6 million was recorded in Q3 2020, against a gross profit of CAD 14.7 million in the previous corresponding period, primarily due to the written down of inventory to its net realizable value owing to the continued oversupply in the Canadian domestic bulk concentrates market.

• The company reported a Net loss of CAD 15.3 million in Q3 2020, compared to a net profit of CAD 3.2 million in Q3 2019. The loss was booked due to write-down of inventory, coupled with high G&A expenses, higher selling expenses, partially offset by an unrealized gain in derivatives. 

Risks associated with investment

Several risk factors could impact the Company’s ability to execute its key strategies successfully and materially affect financial performance. To name some of these risks are like reliance on licences and authorization, disruption in the supply chain, inability to sustain pricing and inventory models, lack of long-term client commitments, etc.

Stock recommendation 

The Company is willing to focus on creating and distributing finished formulated products throughout the Canadian and Australian domestic channels and into other international markets. Moreover, it expects the proportion of sales mix to be comprised of finished formulated products, which would increase as they are continuously expanding the breadth (product formats) and depth (SKUs per product format) of its finished formulated product capabilities, which seems impressive. Recently, the Company raised CAD 33.35 million, which it intended to fund the growth of its Cannabis 2.0 product portfolio, expand medical products and Active Pharmaceutical Ingredient portfolio for export. On the valuation front, the stock is available at forward EV/Sales multiple of 0.76x against the industry median of 4.97x. Hence, considering the aforesaid rationale, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 0.495 on March 16, 2021.

1-Year Price Chart (as on March 16, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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