Celestica Inc

Celestica Inc (TSX: CLS) is a provider of supply chain solutions. The company operates in the electronics manufacturing services business segment. The company offers a range of services to its customers, including design and development, engineering services, supply chain management, new product introduction, component sourcing etc.

Investment rationales

• Leader in Capital Equipment Solutions: The company provides highly specialized solutions for a diverse set of capital equipment industries. At this prevailing scenario company’s focus is to help customers in staying ahead of technology trends by building effective supply chains and accelerating long-term growth. As a leader in design, manufacturing, hardware platform and supply chain solutions, the company brings global expertise and insight at every stage of product development.
• Ample Liquidity: With ongoing uncertainties, we believe that the company’s liquidity position is strong. Since they generated cash from operations and the impact of productivity initiatives, some of the liquidity highlights are as: (i) US$435.9 mn in cash and cash equivalents (ii) US$428.8 mn available under credit facility (iii) US$142.7 million in uncommitted bank overdraft facilities for intraday and overnight operating requirements.

Source: Company

• Clearing Debts in tight scenario: Company was able to Repay US$61.0 million of their outstanding term loan borrowings. This will bring down their interest cost, which would improve their operating margins as well as the bottom line. Cutting down the debt gives a fair idea that that company can generate positive cash flows.

Key Financials

Source: Company

1. Revenue: US$1.49 billion, increased 3% compared to US$1.45 billion for the second quarter of 2019 (Q2 2019).
2. Gross Profit: US$108.6 mn, increased 11% compared to 97.8 mn for the second quarter of 2019 (Q22019)
3. SG&A Expenses and Other charges: Company was able to curtail down the SG&A expenses by nearly 4% while the other charges were dropped by 30%, this helped the company to post positive EPS number for this quarter.
4. IFRS earnings per share (EPS): US$0.10 per share, compared to a US$0.05 loss per share for Q2 2019.

Segment Analysis

Source: Company

Restructuring Update:

The company came to a mutual agreement with their largest customer, Cisco Systems, Inc. (Cisco), to a phased exit from existing programs in 2020. They expect to complete this restructuring program by the end of 2020. The company recorded a total of US$15.3 million in restructuring charges during 1H 2020, including US$7.3 million of restructuring charges recorded in Q2 2020.

Upcoming Event

Q3 2020 FINANCIAL RESULTS on Oct 28, 2020 at 8:00 AM EDT

Risk

The group is exposed to concentration risk as during the quarter, two clients had contributed more that 10% each to the group’s revenue. 

Share Price Performance

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): Price to Earnings

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

Stock Recommendation

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. 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. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 9.61 on October 9, 2020.

Sierra Metals Inc

Sierra Metals Inc (TSX: SMT) is a precious and base metals producer in Latin America. The company acquires, explores, extracts, and produces mineral concentrates consisting of silver, copper, lead, zinc and gold in Mexico and Peru. Its activity includes the operation of the Yauricocha Mine in Peru and the Bolivar and Cusi Mines in Mexico.

Investment rationales

• Ramp up operations: As the restrictions were imposed for mining companies due to COVID-19, the operations were stalled at 2 major mines. But from June Company recalled its employees and ramped up operations at these sites. Therefore, in the coming quarters, production is likely to increase.
• Copper had its best quarter: The company derives ~42% of revenues from copper segment and copper had its best time. A demand recovery from China, the world’s largest consumer, along with supply constraints within Chile and Peru, have pushed the metal prices northward.
• Strong growth story: This growth story is building on a very successful lower risk and near mine brownfield exploration efforts taken by company since 2016 and are yielding remarkable reserves and increase in resources.

QUARTERLY FINANCIAL REVIEW

Source: Company

The Company’s Q2 operations were impacted by the government-mandated shutdowns in Peru and Mexico, imposed to contain the advancement of the COVID-19 pandemic situation. As a result of these shutdowns:

The Yauricocha Mine experienced a 20% reduction in throughput during Q2 2020 compared to Q2 2019, due to the afore-mentioned government-imposed state of emergency. The reduction in throughput was partially offset by higher head grades and higher silver and gold recoveries at Yauricocha, which resulted in a 15% decrease in copper equivalent pounds produced during Q2 2020 compared to Q2 2019.

At Bolivar, higher grades and recoveries were partially offset by the 5% decrease in throughput, resulting in a 24% increase in copper equivalent pounds produced during Q2 2020 compared to Q2 2019. A mere 5% decrease in throughput, despite the COVID-19 related shutdown, resulted from the increased plant capacity attributable to the expansion completed at the end of 2019.

Cusi remained under care and maintenance throughout the quarter and hence there was no production for Q2 2020.

Source: Company

Management has revised 2020 production guidance

The Company has issued revised 2020 production guidance and anticipates:

• copper equivalent production will range between 110.1 to 122.3 million pounds
• silver equivalent production will range between 17.4 to 19.4 million ounces
• zinc equivalent production will range between 286.8 to 318.7 million pounds.

This decrease from the original 2020 guidance is related to work stoppages during the government mandated shutdowns due to the pandemic in Q2 2020

Below is a table summarizing 2020 production guidance

(In thousands of United States dollars, unless otherwise stated)

Source: Company

Price Performance

Source: Refinitiv, Thomson Reuters 

Risk

The group’s revenue is directly related to the prices of commodities in international market. Any volatility in commodity (Copper, Gold, Zinc etc) prices would affect the group’s performance.

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock Recommendation

The company is likely to gain in the long run, thanks to its diversified portfolio, a strong pipeline of development and exploration projects. Further, the demand from China is picking up which is expected to act as a support to the copper prices.  With the resumption of the mining activities along with a gradual increase in the demand, we expect an improvement in the metal prices which would further support the company's top-line in the coming days. The group is likely to benefit from the elevated gold prices as it derives a certain portion of its revenue from gold sales. We have valued the stock using EV/EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Major Drilling Group International Inc, Karora Resources Inc and Forage Orbit Garant Inc etc. Hence, considering the above facts, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 1.98 on October 9, 2020.

Disclaimer

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