Celestica Inc.

Celestica Inc. (TSX: CLS) is a US-based electronic manufacturing service (EMS) company which offers a variety 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 & Cloud Solutions (CCS).

Key Highlights:

• Lower Debt: The company reported a lower debt-component of USD 579.3 million in Q3FY20 compared to USD 7 million in FY19. The decrease in the debt-component would likely to result in lower finance costs and would support the company’s bottom-line. The group reported finance costs of USD 28.6 million for 9MFY20, significantly lower than USD 38.2 million in the previous corresponding period (pcp).
• Impressive Guidance: For FY20, the company expects its top-line to exceed more than USD 800 million, significantly higher than FY19, which is a key positive. The management cited that the corporation would likely to generate at least USD 100 million of free cash FY20, which would support the company liquidity.

Q3FY20 Financial Highlights:

• CLS declared its third-quarter results, wherein the company reported a top-line of USD 1,550.5 million, as compared to USD 1,517.9 million in the previous corresponding period (pcp). The increase was driven by higher revenue from CCS segment (USD 1,024.7 million versus USD 958.9 million in Q3FY19), while a lower income from ATS segment (USD 525.8 million, against USD 559 million in pcp) stood as a drag.
• The company’s reported its gross profit at USD 124.2 million, higher than USD 97.7 million in the previous corresponding period (pcp). The growth was supported by higher revenue and stable cost of sales.
• Earnings before taxes stood strong at USD 40.3 million, compared to USD 6.4 million in pcp, supported by higher earnings from operations coupled with a lower finance cost (USD 8.9 million versus USD 12 million in Q3FY19).
• The group reported a net profit of USD 30.4 million, as compared to a net loss of USD 6.9 million, a year ago.
• Cash and cash equivalent stood at USD 451.4 million, while total assets were stood at USD 3,789.3 million.                

Q3FY20 Income Statement Highlights (Source: Company Reports)

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:

CLS 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. Last but not least, the company has more than 280 patents and has shipped more than 2.5 million units and has launched more than 150 programs, which describes the company’s wide-spread portfolio and clientele. On the technical analysis front, the stock closed above the 100-days, 150-days and 200-days simple moving average, indicating a bullish price trend. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a target upside of double-digit upside (in percentage terms). For the said purposes, we have considered peers like Flex Ltd, Jabil Inc etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 10.10 on January 4, 2021.

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

Nuvista Energy Ltd

Nuvista Energy Ltd (TSX: NVA), is a Canada-based company engaged in exploration, development and production of oil and natural gas reserves in the Western Canadian Sedimentary Basin. The Company's primary focus is on Montney formation in the Alberta Deep. 

Key Highlights

• Positive Outlook: Despite volatile economic conditions, the group has maintained its production levels, which reflects the operational resiliency. For FY 2020 and FY 2021, the group expects its production to be in a range of 50,250 – 52,000 Boe/day, looks impressive.

Source: Company

• Material reductions in costs, drive improved capital efficiencies: The company reported a lower operational cost over the years, driven by an upturn in drilling performance and constant focus on placing proppant more efficiently while improving completions intensity. This reduction in operating cost is likely to result in margin improvement.

Source: Company

• Robust cash flow generation: Amid lacklustre global economic condition and lower energy demand in the wake of COVID-19 pandemic, the company has preserved its cash flow levels. During the second half of FY 2020, the company is likely to generate CAD 80 million cash flow, while for FY2021 cash flows are anticipated to be in a range of CAD 200 - 265 million.

Source: Company

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the Company's petroleum and natural gas revenues decreased 24% to CAD 105.7 million, compared to CAD 138.8 million in the previous corresponding period. The decline was driven by a 20% decrease in average per Boe realized price and decreased production by 5% for the quarter.
• Total Operating expenses stood at CAD 117.7 million decreased by 12.7% in Q3 2020, against CAD 134.9 million in pcp.
• The Company's net loss stood at CAD 44.1 million, compared to CAD 7.6 million in Q3 2019, primarily due to lower income partially offset by a lower total expense.

Risks associated with investment

The company is exposed to various market risks in the ordinary course of operations that could impact its earnings and cash flows. Other important risk factors include lower crude oil demand, lower production, and volatility in crude oil prices.  

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock recommendation

Global crude oil prices have recovered significantly from march lows in the wake of easing lockdown restriction and lifting the ban on travel restriction in many geographies. Crude oil prices were relatively stable during Q3 2020. We expect a recovery in the oil price to continue in the coming days, which would support the company's performance. During the second half of FY 2020, the company is likely to generate cash flow of CAD 80 million, while for FY2021 cash flows are expected to be in a range of CAD 200-265 million on the back of improved production and bringing down the operation costs. Therefore, based on the above rationale and valuation, we have given a "Speculative Buy" rating at the closing price of CAD 0.92 on January 4, 2021. We have considered Baytex Energy Corp, Birchcliff Energy Ltd, Bonterra Energy Corp, etc. as a peer group.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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