Celestica Inc.

Celestica Inc. (TSX: CLS) offers innovative supply chain solutions to its customers across the globe. The Company has two operating segments, namely, Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). ATS segment consists of ATS end market and is comprised of the aerospace and defense (A&D), industrial, energy, etc. while CCS business includes semiconductor, display, and power & signal distribution equipment businesses.

Q2FY20 Financial Highlight: Celestica Inc. declared its quarterly results, wherein the Company posted revenue of USD 1,492.4 million, as compared to USD 1,445.6 million in the previous corresponding period (pcp). The marginal increase was driven by strong growth from the CCS segment, which was partially offset by a lower income from the ATS segment. The quarter was marked by a lukewarm demand from the commercial aerospace and industrial segments on account of lower COVID-19 pandemic. However, gross profit grew to USD 108.6 million, against USD 97.8 million in pcp, thanks to a higher income. Earnings from operations stood at USD 30.1 million, significantly higher than USD 11.6 million in pcp, driven by a higher gross profit coupled with a positive impact from several cost efficiency measures. Selling, general & administrative expenses and Research & development costs stood lower than the previous corresponding quarter. The group reported Amortization of intangible assets at USD 6.6 million, as compared to USD 7.8 million in pcp. The Company reported a lower finance cost of USD 8.9 million, against USD 12.6 million recorded in pcp, which supported the bottom-line. Net earnings stood at USD 13.3 million, as compared to a net loss of USD 6.1 million in pcp. The group reported cash and cash equivalent of USD 435.9 million while total assets stood at USD 3,788.1 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: During 1H20, two clients had contributed more than 10% each to the group’s revenue. Loss of such clients might affect the top-line drastically. The order book from A&D, industrial and display businesses is likely to remain low in the near term, which might hamper the performance.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation: Amidst a tepid macro scenario and a glitch in the equity markets, the stock of CLS performed well and appreciated ~14% in the last one year. The company reported a 12% y-o-y growth from Connectivity & Cloud Solutions (CCS) segment and reported improved sales from value-added solutions, which comforted the margins. The company repaid USD 61.0 million of outstanding term loan borrowings, which is impressive and would lower the finance costs. Furthermore, the company expects its semiconductor business to improve in the coming days. Within the aerospace and defense (A&D) segment, the defense segment remained stable during the quarter, while aerospace market faced short-term hiccups during the period. The company took prompt measures by reducing the costs of A&D segment. We have valued the stock using P/E 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. The group has reported a decent quarterly result, and the proportion of higher-margin business is likely to increase going forward. However, client concentration (two clients contributed more than 10% each to 1HFY20 revenue) poses a risk. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 9.89 on September 4, 2020.

CLS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Martinrea International Inc

Martinrea International Inc (TSX: MRE) is a Canada based manufacturer and produces metal parts and fluid management systems. The products are used primarily in the automotive sector by the majority of vehicle manufacturers. The group also produces aluminum engine blocks, specialized products, suspensions, chassis modules and components, and fluid management systems for fuel, power steering and brake fluids.

Q2FY20 Financial Highlights: Martinrea declared its quarterly results, wherein the company posted revenue of CAD 460.564 million, significantly lower than CAD 948.533 million recorded a year ago. The company’s performance was impacted by the overall industry slowdown on account of COVID-19 pandemic. Furthermore, lower tooling sales contributed the decline, partially offset by the positive impact from foreign exchange translation of U.S.-denominated production sales; while the launch of new programs related to the production of ventilator stands for General Motors supported the sales. The period was marked by a 58% y-o-y lower income from North America at CAD 318.134 million, while European sales fell 40% on y-o-y basis to CAD 99.988 million. The group reported a gross loss of CAD 12.459 million, against a gross profit of CAD 154.778 million in the previous corresponding period (pcp), due to a lower income, coupled with a surge in costs of sales and higher depreciation. The company reported a dip in Research & development and SG&A expenses, while reported higher impairment charges of CAD 85.783 million against CAD 18.502 million in pcp. The group posted a net loss of CAD 146.886 million as compared to a net profit of CAD 28.122 million in Q2FY19.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The second wave of COVID-19 might result in operation shut down and supply chain disruption, which would hamper the group’s performance. The group is operating in the highly cyclical nature of the automotive industry and the industry’s dependence on consumer spending, and general economic conditions would affect the demand.

Valuation Methodology: EV / EBITDA Based (Illustrative)

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

Stock Recommendation: The MRE stock corrected ~30% so far this year on account of demand destruction scenario due to COVID 19 pandemic. The company is engaged in the design, development and manufacturing of highly engineered, value-added Lightweight Structures and Propulsion Systems. The group stated that a phased restart of the company’s manufacturing facilities and dependent functions commenced in May and June 2020 and continued into the third quarter as OEMs began producing vehicles again. All of the group’s facilities are operational now, and the group is anticipating strong third quarter. The company reported the continuation of the production process across China, and we expect the demand to improve in the coming days. The group believe that the industry had seen the bottom from a volume perspective, look forward to the broader industry and economic recovery. We expect a demand pickup of the automobiles, with the gradual reopening of the economy which would boost the company’s sales volume. Furthermore, to ensure liquidity, the company has opted for temporary layoffs of employees and postpended its capital expenditure programs. We have valued the stock using the EV/EBITDA based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered peers like Magna International Inc, Linamar Corp and NFI group etc. Hence, considering the aforesaid facts and risk factors, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 9.99 on September 4, 2020.

MRE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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