Martinrea International Inc

Martinrea International Inc (TSX: MRE) is a Canada based manufacturer of metal parts and fluid management systems. Its products are used primarily in the automotive sector by the majority of vehicle manufacturers.

Key highlights

• Strong growth led by a European region: Despite the difficult moment for the automobile industry due to the global pandemic, the firm showed resilience in Q1 2021, growing in every region. The European region did very well, with revenues increasing by 58.9% to CAD 254.0 million from CAD 159.8 million in the previous corresponding quarter. Sales increased as a result of the introduction of new programs during or after the first quarter of 2020, mostly with Volvo and Ford; and increased production volumes on certain platforms, primarily with Daimler and Jaguar Land Rover.

• Strategic investment: The Company possessed 35.04 million common shares of NanoXplore Inc. as of March 31, 2021, representing a 22.2% equity stake in NanoXplore, a publicly traded company on the TSX Exchange under the ticker code GRA. It is a graphene powder manufacturer and supplier for industrial sectors, offering various graphene-based solutions to customers.
  

• Venturing into electric vehicle battery production: The Company recently formed a 50/50 joint venture with NanoXplore, called VoltaXplore to develop and build graphene-enhanced electric car batteries. We believe the company has unique technology that has the potential to provide a solution for producing electric car batteries that would assist governments and automakers in meeting ambitious objectives for electric vehicle production.
  

Financial overview of Q1 2021 (in thousands of Canadian dollars)

Source: Company

• The Company’s consolidated sales in Q1 2021 increased by CAD 124.4 million or 14.3% to CAD 997.1 million compared to CAD 872.7 million in the previous corresponding period. The group witnessed a healthy performance from all geographies.
• The group reported a gross profit of CAD 120.8 million compared to CAD 120.3 million. Gross margin as a % of sales decreased to 12.1% V/s 13.8% in pcp, mainly due to an increase in aluminium raw material cost, which increased the cost of sales.
• Operating income for the reported period stood at CAD 47.4 million, against CAD 49.2 million in pcp.
• The Company posted a higher net income of CAD 38.7 million in Q1 2021, against CAD 28.9 million in pcp. The higher net income was mainly supported by higher revenues and gain on dilution of investment in associate worth CAD 7.8 million.
  

Risks associated with investment

The company is prone to many risks associated with the nature of their business which could hamper the performance of the company. Some of these risks include, fall in demand from automobile manufactures, disruptions from the supply chain, any technological change, increased prices of raw materials and commodities, etc.

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

Short-term challenges impacted the company's performance in Q1 2021, including an industry-wide semiconductor shortage, a brief lag in the pricing pass-through of increasing aluminum costs, and a growing third wave of COVID-19 creating further short-term problems in some areas. Despite this, it reported a good set of figures, with sales increasing 14.3% and net income increasing, which is commendable. Recently, the business launched VoltaXplore, a joint venture with NanoXplore to develop and create graphene-enhanced electric car batteries. As the demand for electric vehicles grows, we anticipate that this segment will provide new avenues for cash flow. Therefore, based on the above rationales and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 12.32 on August 05, 2021. We have considered Abc Technologies Holdings Inc, Linamar Corp, Superior Industries International Inc, etc. as the peer group for the comparison.

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

Technical Analysis Summary

One-Year Technical Price Chart (as on August 05, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Ag Growth International Inc

Ag Growth International Inc (TSX: AFN) is a leading provider of equipment solutions for agriculture bulk commodities including portable and stationary grain handling, storage and conditioning equipment, belt conveyors, grain storage bins, grain handling accessories, grain aeration equipment and grain drying systems.

Key highlights

• Improving macros would support future growth: Crop yields, prices, and trade flow, all are increasing, indicating that global macroeconomic conditions are strengthening. While the company's demand drivers are more closely linked to crop numbers, trade procedures, and consumption levels, the current agricultural pricing scenario provides a good tailwind for its markets. Favorable farm-level conditions in North America would continue to drive demand for its products.

• Delivering sustainable growth: In Q1 2021, the Company continued its momentum, with sales increasing by 11.8% to CAD 256 million on a year-over-year basis, and Adjusted EBITDA increasing by 52.1% to CAD 39.1 million from CAD 25.7 million in the previous corresponding quarter. The Company’s continuous growth in revenue and Adjusted EBITDA is supported by healthy demand and a substantial backlog.\

• Firm order backlog: Order intake continues to be high, with excellent backlogs indicating that sales are on pace. This demonstrates the company's newfound resilience in terms of its business strategy. The company's agricultural backlog has risen by 75% year over year. Customers' emphasis has resulted in a surge in demand for farm equipment. As of March 31, 2021, the Commercial segment's backlog was up 17% year over year, resulting in a 40% increase in overall backlog.
  

Financial overview of Q1 2021 in thousands of CAD

Source: Company

• The Company posted an increase in net sales by 10.7% to CAD 253.7 million, compared to CAD 229.1 million in Q1 2020, mainly due to healthy sales performance from all segments, primarily farm segment and commercial platform in all the geographies, partially offset by the Canada region.
• The Company posted a higher gross profit at CAD 76.0 million in Q1 2021, compared to CAD 61.2 million in pcp, on the back of higher revenue.
• Profit before income tax stood at CAD 18.1 million, against a loss of CAD 57.5 million in pcp.
• The Company recorded a net income of CAD 12.7 million in Q1 2021, compared to a net loss of CAD 48.8 million in the previous corresponding period, due to the above-stated reason.
  

Risks associated with investment

In the near-term, the rise of steel, component, packaging, and freight costs would pressure the gross margin. While cost increases can be passed onto customers in many instances, the meteoric rise in steel costs would impact the company’s Q2 and Q3 2021 margins.

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

First-quarter 2021 results include strong contributions from all business segments with consolidated trade sales and adjusted EBITDA up 12% and 52% on YoY basis, respectively. The company is continuously recognizing the benefits of its diversification into new markets and new products. Furthermore, despite the challenges of rising steel price, component, packaging, and freight costs, the company expects strong full-year trade sales and adjusted EBITDA above the FY 2020 levels. Additionally, the order intake continues to be robust with solid backlogs, providing good visibility to sales growth. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 30.90 on August 05, 2021.

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

Technical Analysis Summary

One-Year Technical Price Chart (as on August 05, 2021). Source: REFINITIV, 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.