Martinrea International Inc.

Martinrea International Inc. (TSX: MRE) is a Canadian producer of steel and aluminium parts and fluid management systems. The product caters to the automotive sector, mostly to vehicle manufacturers.

Key Highlights:

• Improving financial metrics in a challenging environment: The group reported a lower net debt in Q4FY20, as compared to Q2FY20, which is impressive. In Q4FY20, the company reported its net debt at CAD 682.4 million, which stood lower from CAD 776.4 million in Q2FY20. Reducing net debt shows higher financial flexibility and is a key positive for the company. Moreover, net debt to adjusted EBITDA improved to 2.11x, as compared to 2.64x in Q2FY20.        

Source: Company Presentation

• Improved demand dynamics indicates industry revival: During the Q4FY20, the company reported improved demand from the Europe and North America regions, which resulted in revenue growth of 23.90% and 7.11%, over Q3FY20, respectively. Notably, on a y-o-y basis, the group reported a growth of 48.1% and 10.0%, respectively, from North America and Europe. The growth in the USA was driven by higher production volumes with General Motors, primarily on the pick-up truck and large SUV platform, while within Europe, positive foreign exchange and new launches from Volvo coupled with higher overall production volumes Daimler and Jaguar Land Rover acted as a positive catalyst.
• Strong FY21 Pipeline led to impressive outlook: For FY21, the company has a robust pipeline of products, supported by key launches from the company’s premium clientele. During FY20, most of the launches has been postponed by the key Auto-manufacturing players due to the pandemic, and hence FY21 is being bestowed with healthy launches, which is expected to support the company’s performance. For Q1FY21, the company expects its production sales within the range of CAD 900 million to CAD 1000 million, higher than CAD 822.5 million in Q1FY20, while adjusted EPS is anticipated to remain within CAD 0.36 to CAD 0.44, v/s CAD 0.38 in Q1FY20.

Source: Company Presentation

• Management Update: On March 04, 2021, the group announced the appointment of Ed Waitzer to its board of directors. 

Q4FY20 Financial Highlights:

• MRE impresses with its fourth quarter FY20 results, wherein the company posted total sales of CAD 1,071 million, reflecting a growth of 16.7% on y-o-y basis. The improvement was driven by solid recovery within the Production Sales segment (CAD 982.3 million v/s CAD 787 million in Q4FY19), partially offset by a slowdown in Tooling Sales (CAD 88.6 million v/s CAD 130.6 million in Q4FY19).
• Operating Income stood at CAD 66.136 million, depicting a whopping 27.6% growth over the previous corresponding period (pcp). The growth was supported by higher gross profit (CAD 155.841 million v/s CAD 129.921 million in pcp) coupled with a reduction in Research and development costs (CAD 7.340 million v/s CAD 9.876 million in Q4FY19), while higher Selling, general and administrative costs (CAD 76.885 million v/s CAD 63.659 million in pcp) remained as a drag. Operating margin improved to 6.2% in Q4FY20 v/s 5.6% in pcp.
• The group reported its net income at CAD 44.970 million v/s CAD 51.153 million in pcp.

Q4FY20 Income Statement Highlights (Source: Company Presentation)

Risks: Continued breakout of COVID-19 would result in a further slowdown in economic growth which would result in a decline in the demand for the group’s offerings. Moreover, a rise in the raw material prices would result in suppressed margins.

Valuation Methodology (Illustrative): EV to Sales based valuation

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

Stock Recommendation:

The company has a strong clientele, and recently, it has witnessed a solid revival in its performance, which is encouraging. Demand across the USA and Europe showing signs of revival, while China is continuing with high demand levels, which is in line with pre-COVID levels. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a low double-digit upside (in percentage terms). For the said purposes, we have considered peers like Magna International Inc, Linamar Corp Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 12.54 on March 26, 2021.

One-Year Price Chart (as on March 26, 2021). Source: Refinitiv (Thomson Reuters)

Ensign Energy Services Inc.

Ensign Energy Services Inc. (TSX: ESI) is a Canada-based company that offers oilfield services include drilling and well servicing, oil sands coring, directional drilling, underbalanced and managed pressure drilling, equipment rentals and transportation. The company provide these services in Canada, the United States and internationally.

Key highlights

• Management’s insight on 2021 Capital Expenditures: The Company has budgeted capital expenditures for 2021 of approximately CAD 50.0 million, focusing on certifications and preventative maintenance for the global high-spec drilling rig fleet and other service lines. In addition to the disciplined capital plan, the company would continue to focus on debt reduction throughout 2021 and onward, preserving liquidity and protecting the balance sheet.

• Improving macros: Oil markets are beginning to recover from demand losses due to the first wave of COVID-19. Commodity prices have relatively stabilized and estimates for 2021 demand recovery continue to stabilize. The company has passed the trough in activity and continue to see improvements quarter-over-quarter as the count of active rigs increased in Q4 2020, along with an upward move in the Brent spot price and WTI spot price.

Source: Company

• Extended credit facility: The company prioritized its balance sheet and liquidity preservation amidst a turbulent operating environment. On December 31, 2020, the company amended and extended its existing CAD 900.0 million revolving credit facility agreement with its syndicate of lenders. The amendments and one-year extension provide access to the revolver capacity and near-term flexibility in a volatile oil price environment.

• Curtailing debts and interest expense: The Company managed to decrease the total debt by CAD 197 million to CAD 1,384.6 million on December 31, 2020, compared to CAD 1,581.5 million in the previous corresponding period. Consequently, interest expense declined to CAD 107.3 million against CAD 135.2 million in the last corresponding period.

Source: Company

Financial overview

Source: Company

• The Company posted revenue of CAD 936.8 million in 2020 compared to CAD 1.59 billion in the previous corresponding period. The decline was primarily due to the adverse impact of the COVID-19 pandemic on the oil and natural gas industry, which led to a decrease in the number of working days in all regions.
• Loss before income tax reported by the company minimized at CAD 120.5 million in FY2020, against CAD 177.9 million in pcp. The Company got support from lower interest expense and gain on repurchase of unsecured notes of CAD 162.8 million.

• The Company posted a net loss from continued operations of CAD 66.7 million compared to CAD 159 million in 2019. 

Risks associated with investment

There are many risks involved with the company that can create a massive impact on the operations and financial health, such as fluctuations in the level of oil and natural gas exploration and development activities, changes in drilling and well-servicing technology, the impact of weather and seasonal conditions on operations and facilities, etc. 

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock recommendation

During the second half of 2020, stay-at-home related restrictions generally were eased globally, increasing the demand for crude oil and natural gas. OPEC+ nations curtailed crude oil supply and producer-led production curtailments, which resulted in improved supply and demand fundamentals. Improved fundamentals resulted in relatively stabilized crude oil commodity prices over the second half of 2020. As a result, drilling and completions activity stabilized and improved modestly. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 1.26 on March 26, 2021. We have considered Precision Drilling Corp, Calfrac Well Services Ltd, Step Energy Services Ltd. Etc, as the peer group for the comparison.

1-Year Price Chart (as on March 26, 2021). Source: Refinitiv (Thomson Reuters)

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.