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 

• Increased margins by improving the cost of sales and other charges: The group has made ideal and reasonable changes in accordance with its business by improving expense and cutting down different costs. Accordingly, the company enlisted improved segment income and margins from both segments on a quarterly as well as on a yearly basis.

Source: Company

• Strong industry growth: The Wafer Fabrication Equipment (WFE) market is expected to reach USD 86 billion by 2024, with a Compound Annual Growth Rate (CAGR) of 9%, while the OLED and Mini LED display markets are expected to reach USD 64 billion and USD 63 billion, respectively, by 2025, with a combined CAGR of 27%, driving display equipment spending higher. To capitalize on this potential, the company has built broad vertical capabilities and a strategic worldwide platform to service the world's major original equipment manufacturers (OEMs) in the WFE and Display equipment markets.

Source: Company

• Robust Guidance: Recently, the management shared its direction on numerous indispensable numbers mirroring their bullish view in 2021, where they anticipate ATS segment income to grow by 10% in 2021, clocking margins in a range of 5% to 6%. Capital Equipment revenues are expected to exceed USD 700 million, representing more than 30% growth over 2020, with margins of 6%. However, the CCS segment revenue for 2021 would decline compared to 2020 and expect double-digit percentage revenue growth for Hardware Platform Solutions business in 2021 compared to 2020.

• Healthy liquidity and reduced debts: Operating operations provide enough cash flow to finance the Company's expected growth strategy. The Company clocked USD 20.9 million of free cash flows and repaid USD 30.0 million of outstanding term loan borrowings in the reported period. Furthermore, the Company had USD 449 million in cash and USD 450 million in undrawn credit as of March 31, 2021. According to management, this liquidity would be adequate to keep the Company running well in the short term.

Financial overview of Q1 2021 (in millions of U.S. dollars)

Source: Company

• In Q1 2021, the company reported a slight decline of 6% in revenue to USD 1,234.9 million, compared to USD 1,318.6 million in the previous corresponding period.
• The company reported USD 101.5 million of gross profit in Q1 2021, compared to USD 91.0 million in Q1 2020. The improved cost of sales was the sole reason behind the higher gross profit.
• EBT increased to USD 15.7 million, against USD 2.3 million in the previous corresponding period. The lower finance cost and lower other charges helped in upgrading the EBT numbers.
• The company posted a net income of USD 10.5 million in the reported period, against a loss of USD 3.2 million in pcp.
  

Risk associated with investment

The IT and related services are prone to price competition, due to the emergence of several players within the industry. This might dampen the company’s margin in the foreseeable future.

Valuation Methodology (Illustrative): Price to Cash Flow 

Stock recommendation

The Company witnessed improved demand and revenue from its semiconductor Capital Equipment customers in Q1 2021 compared to Q1 2020, driven by strong demand, new program wins, and market share gains. The group expect semiconductor demand to remain strong in 2021, while the demand would accelerate towards the end of 2021 and into 2022 in its display business. Furthermore, the management would continue to take appropriate cost reduction and productivity actions to improve the overall performance and adjust the cost base to align with anticipated demand levels. Moreover, it shared guidance on many important numbers reflecting their bullish view for 2021. Based on technical analysis, the stock has support at CAD 8.3 level. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 10.12 on June 15, 2021. We have considered Jabil Inc, TTM Technologies Inc, Flex Ltd, etc., as the peer group for comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

One-Year Price Chart (as on June 15, 2021). Source: Analysis by Kalkine Group

Goldmoney Inc.

Goldmoney Inc. (TSX: XAU) is engaged in precious metal sales to its clients on its online platform. Its services include arranging delivery and storage of precious metals for its clients, coin retailing, and lending.

Key highlights 

• Growth in Asset Under Custody: The company's asset under management has remained stable in recent years, owing to its continued focus on offering a smooth experience, as well as additional services such as custody arrangement, dealing, managing, and unrivalled research. The company has clients in 150 countries and manages about CAD 2.54 billion in precious metal assets.

Source: Company

• Higher Fee Revenue: The company has experienced consistent growth in fee income in recent years, which has aided its overall success. Notably, fee revenue for the first nine months of FY21 was CAD 7.03 million v/s CAD 1.92 million in pcp, representing a staggering 265.5% year-over-year increase. Notably, the company's fee revenue has been steadily increasing in recent quarters. The increase was supported by an increase in client metal holdings, growth in precious metal fair value, coupled with the company's policy of a minimum monthly fee and non-active/dormant account fees.

Source: Company 

• Healthy Liquidity:The Company hold sufficient liquidity to continue their ongoing development of Goldmoney.com, LBTH and Schiff Gold, acquire new users, and explore additional opportunities. The Company believes its working capital balance is sufficient to fund expected requirements for the next 12 months.
  

Financial overview of Q3 2021 (Expressed in Canadian Dollars)

Source: Company 

• In Q3 2021, the Company posted revenue of CAD 97.5 million, decreased 10% from CAD 108.1 million in Q3 2020. The Company’s precious metal trading operations experienced a CAD 14.7 million decrease, partially offset by the CAD 4.1 million increase to the bullion and coins segments as compared to Q3 2020.

• The Company managed to increase its gross margin by 41.7% to CAD 3.4 million, against CAD 2.4 million in Q3 2020. The increase is attributable to strong precious metal demand and increased margins. 

• Gross profit increased to CAD 4.9 million in Q3 2021, compared to CAD 4.3 million in the previous corresponding period, primarily due to increased precious metal revenues, profit margin and fee revenues.

• Total operating expenses in Q3 2021, stood at CAD 3.6 million against CAD 6.7 million in pcp. The operating expenses declined mainly due to lower professional fees and gain on foreign exchange.
• Net income in the Q3 2021 stood at CAD 4.0 million as compared to loss of CAD 2.9 million in Q3 2020.

Risks associated with investment

The Company is exposed to price risk of gold, silver, platinum, and palladium held as assets. Commodity price risk is defined as the potential adverse impact on the earnings of the Company. Other risks involved are like Foreign Currency Risk, Interest Rate Risk, and Liquidity Risk, etc.

Stock recommendation

We expect the precious metal markets to maintain its good performance in H2 2021, with gold and silver prices to remain elevated due to robust demand as investors cope with the economic effects of the pandemic and low-interest-rate environment. By making precious metals-backed savings available to everyone, the organization cultivates long-term partnerships with a worldwide client base. The client asset of the organization has consistently expanded to CAD 2.5 billion, which is noteworthy. Based on technical analysis, the stock has support at CAD 2.3 level. On the valuation front, the stock is available at an EV to Sales multiple of 0.3x on TTM basis, which is significantly lower than the industry median of 5.1x. Considering the above rationale, we recommend a ‘Speculative Buy’ rating on the stock at the last closing price of CAD 2.75 on June 15, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock if the price closes below the support level.

One-Year Technical Price Chart (as on June 15, 2021). Analysis by Kalkine Group 

*The reference data in this report has been partly sourced from REFINITIV.

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.