Martinrea International Inc

Martinrea International Inc (TSX: MRE) is a Canada based manufacturer of metal parts and fluid management systems. The products are used primarily in the automotive sector by the majority of vehicle manufacturers. The group also produces aluminum engine blocks, specialized products, suspensions, chassis modules and components, and fluid management systems for fuel, power steering and brake fluids.

Q2FY20 Financial Highlights: MRE announced its quarterly results, wherein the company posted revenue of CAD 460.564 million, reflecting a decline of 51.4% on y-o-y basis. The business witnessed a sluggish demand due to the overall industry slowdown on account of COVID-19 pandemic. The quarter witnessed a decrease in sales due to y-o-y decline in the North America and Europe operating segments, partially offset by an increase in the Rest of the World. The group reported a gross loss of CAD 12.459 million, against a gross profit of CAD 154.778 million in Q2FY19, primarily attributable to a lower income, and a higher cost of sales and higher depreciation. The company reported a decline in the Research & development and SG&A expenses, while reported higher impairment charges of CAD 85.783 million against CAD 18.502 million in the previous corresponding period (pcp). Operating loss stood at CAD 163.365 million, against a profit of CAD 57.302 million in Q2FY19. The group posted a net loss of CAD 146.886 million as against a net profit of CAD 28.122 million in Q2FY19. The company ended the quarter with a cash balance of CAD 125.834 million, while total assets were reported at CAD 3,224.712 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The second wave of COVID-19 might result in operation shut down and supply chain disruption, which would hamper the group’s performance. The group is operating in the highly cyclical nature of the automotive industry and the industry’s dependence on consumer spending, and general economic conditions would affect the demand.

Valuation Methodology: EV to EBITDA Based (Illustrative)

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

Stock Recommendation: The stock declined ~31% so far this year amid a challenging operating environment driven by COVID-19 pandemic. The company witnessed a significant setback from the lower industrial demand, which subsequently dampened the overall order book from the original equipment manufacturers (OEMs). However, the automobile industry saw a demand revival for the month of July and August, and we expect the momentum to continue, as the economic activities are returning on track. The group stated that a phased restart of the company’s manufacturing facilities and dependent functions commenced in May and June 2020 and continued into the third quarter as OEMs began producing vehicles again. All of the group’s facilities are operational now, and the group is anticipating strong third quarter. The company reported the continuation of the production process across China, and we expect the demand to improve in the coming days. The group believe that the industry had seen the bottom from a volume perspective, look forward to the broader industry and economic recovery. Furthermore, the company enhanced its liquidity position by increasing the revolving credit lines by USD 200 million, which seems sufficient to support the working capital. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have peers like Magna International Inc, Linamar Corpetc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 9.95 on October 2, 2020.

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

NFI Group Inc.

NFI Group Inc. (TSX: NFI) is a Canadian automobile manufacturer. The company operates via two segments: manufacturing operations and aftermarket operations. Manufacturing operations, which represents more than half of the company's revenue, includes the manufacture of transit buses for public transportation, and motor coaches. Aftermarket operations include spare parts and servicing related to transit buses and motor coaches.

Key Highlights:

• NFI has delivered two pilot buses to Metro Transit as part of a contract awarded to New Flyer for 14 Xcelsior CHARGE™ battery-electric, sixty-foot heavy-duty transit buses. The company received orders from Bi-State Development worth USD 8.72 million.
• The Management declared a quarterly dividend of CAD 0.2125 per share, payable on October 15, 2020.
• The company informed that Central Ohio Transit Authority has exercised options for two Xcelsior CHARGE™ battery-electric, forty-foot heavy-duty transit buses. The order includes two ABB depot chargers and commissioning by New Flyer Infrastructure Solutions™ to support electric bus deployment and infrastructure development in Columbus, Ohio.

Q2FY20 Financial Highlights: NFI announced its quarterly results and posted revenue of USD 333.334 million, significantly lower than USD 683.353 million in the previous corresponding period (pcp). The decline was primarily attributed to a 57.4% decline in manufacturing revenue due to temporary idling of production facilities on account of COVID-19 combined with a 15.6% y-o-y decline in the aftermarket revenue due to reduced transit services activity. The company posted a gross loss of USD 17.379 million, against a gross profit of USD 98.785 million in Q2FY19, on account of a lower income. The quarter was marked by a lower sales, general and administration costs and a higher foreign exchange loss. The company reported a net loss of USD 74.05 million, against a net profit of USD 8.507 million in pcp, primarily attributable to higher interest on long-term debt, partially offset by a significantly lower fair market value loss on interest rate swap.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: COVID-19 has affected the group’s operations and performance. Due to the pandemic, the group’s manufacturing operations were closed temporarily. Though, the group has resumed manufacturing operations, further break out of the novel virus would result in shut down of facilities, which would affect the overall performance.

Valuation Methodology: EV to Sales Based (Illustrative)

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

Stock Recommendation: After idling facilities for the majority of the second quarter, the Company restarted all manufacturing facilities in mid-May through June. Recently, the electric vehicles and related industries received the support of £7.4 million from the Scottish Government, which is a key positive for the group. As all the state governments are indulging in less pollution environment through the replacement of conventional vehicles with electric vehicles, we believe the company is well placed to receive added orders in the coming quarters. The group's backlog position stood at 10,004 EUs (4,400 EUs Firm and 5,604 options) valued at USD 4.9 billion. The group is expected to generate more than USD 75 million in annualized cost savings by the end of FY22. Based on the Company's contractually obligated vehicle sales, updated production schedule expected private market deliveries and anticipated aftermarket sales; the management expects Adjusted EBITDA of USD 145 million to USD 155 million for Fiscal 2020, which would represent USD 113 million to USD 123 million during the second half of 2020. We have valued the stock using the EV to Sales based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purposes, we have considered peers like Bombardier Inc, Linamar Corp and TFI International Inc etc. Considering the aforesaid facts, we recommend a 'Speculative Buy' stance in the stock at the closing market price of CAD 17.50 on October 2, 2020.

NFI daily price chart. Source: Refinitiv (Thomson Reuters)

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