Martinrea International Inc.

Martinrea International Inc (TSX: MRE) is a Canadian producer of steel and aluminum parts and fluid management systems. The product caters to the automotive sector, primarily to vehicle manufacturers and have a presence across more than ten countries.

Key Highlights:

• Strong Growth led by European region amidst the economic jolt: During the first quarter of FY21, the group reported performance from Europe where sales soared 58.9% on y-o-y basis to CAD 254.1 million, driven by the launch of new programs related to Volvo and Ford, while witnessed higher production volumes on specific platforms, with Daimler and Jaguar Land Rover. Additionally, the acquisition of Metalsa also supported the company operations. 

• Product Innovation and strong partnership with premium manufacturers: The company has been able to innovate its products over the period, supported by the usage of advanced technologies and strong R&D activities. This has resulted in higher value proposition to its clients. Moreover, the company works with the leading automobile companies across the globe and has created intense, long-term partnerships, which is a key positive.               

Source: Company Presentation

• Elevated Cash flows and Controlled Capital expenditure: Over the years, the company reported consistent growth in its operating cash flows, except in FY20, due to the demand destruction scenario from the Automobile segment. Moreover, the company managed its capital prudently, which has resulted in a standstill capital expenditure.                    

Source: Company Presentation

• Partnership with VoltaXplore Inc. On April 15, 2021, the company announced its joint venture with graphene producer NanoXplore Inc., wherein the joint venture named VoltaXplore Inc., would develop electric vehicle (EV) batteries enhanced with graphene.

Q1FY21 Financial Highlights:

• MRE impresses with its first-quarter FY21 result, wherein the company posted revenue of CAD 997.150 million, up 14.3% on y-o-y basis. The improvement was driven by solid growth from the European Geography, while the North American segment grew 2.4% as compared to the previous corresponding period (pcp).

Source: Company Report

• Adjusted EBITDA recorded at CAD 109.815 million, up 1.9% on y-o-y basis. The quarter was marked by lower Research and development costs (CAD 7.809 million v/s CAD 9.453 million in Q1FY20), while higher Selling, general and administrative costs (CAD 60.750 million v/s CAD 57.408 million in pcp) coupled with inclusion of restructuring costs amounting CAD 1.029 million remained a drag.
• The group reported net income at CAD 38.701 million, reflecting a growth of 33.6% on y-o-y basis. The improvement was partially supported by a lower finance expense (CAD 8.411 million v/s CAD 9.462 million in pcp).

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The first quarter was impacted by the lower demand from the semiconductor industry, and higher prices of aluminum impacting margins. Continuation of the above trend would result in suppressed performance.

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock Recommendation:

With the growing usage of BEV/ Hybrid Platforms, the company has been able to improve its revenue from the particular segment, from less than 1% of the total revenue in FY15 to 8% in FY20, while the segment is likely to contribute 21% and 25% of the total revenue in FY23 and FY25, respectively.  

Source: Company Presentation

Despite a short-term glitch, due to the ongoing pandemic, the long-term business prospects remain extremely attractive, and MRE expects its sales within the range of CAD 4,600 – 4800 million in FY23, and its free cash flow to reach above CAD 200 million, from CAD 62 million and CAD 115 million in FY20 and FY19, respectively. We have valued the stock using the EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered Linamar Corp, Superior Industries International Inc and Abc Technologies Holdings Inc etc., as a peer group for the comparison. Based on technical analysis, the stock has support at CAD 11.4 level. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of MRE at the closing market price of CAD 13.73 on May 10, 2021.

*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 May 10, 2021). Source: Refinitiv (Thomson Reuters)

Rogers Sugar Inc

Rogers Sugar Inc (TSX: RSI) is a Canada based sugar manufacturing company, which is engaged in refining, packaging, and marketing of sugar and related products.

Key Highlights:

• Stable Dividend Payment: The company has a solid history of consistent dividend payout, backed by stable cash flows, which indicates operational resilience. The stock of RSI carries a dividend yield of ~6.36%, which is lucrative considering the current interest rate scenario. Despite the ongoing economic crisis, the company paid a total dividend of CAD 18.636 million in H1FY21, at par with CAD 18.863 million in H1FY20.

 Five Years dividend Distribution; Source: Refinitiv (Thomson Reuters)

• Improved Sectoral Outlook: The company’s performance remained in uptrend in the recent past, supported by improved demand dynamics from the sugar industry in North America. The growth was primarily supported by the increase in large industrial food demand coupled with higher export opportunities. Moreover, increasing demand from the liquid market also supported the recent growth.

Sugar Industry Demand (in Metric Tonnes), Source: Company Presentation

• Growing Traction from Maple Syrup: During the last decade, elevated demand from maple syrup has remained as a significant contributor to the company’s growth, which is a key positive. The company is the largest bottler and distributor of Maple products globally and has more than 30% market share. Moreover, the company’s ~84% exports are related to maple syrup.

Source: Company Presentation

• Issuance of Senior Notes: On April 30, 2021, the company reported private placement of CAD 100 million 3.49% Senior Guaranteed Notes due April 30, 2031. The above funds would be used for the repayment of existing debt.

Q2FY21 Financial Highlights:

• RSI announced its quarterly result, wherein the company posted revenue of CAD 215.929 million, v/s CAD 199.126 million in the previous corresponding period (pcp). During the quarter, the company sold 183,749 metric tonnes of sugars, higher than 175,226 metric tonnes in pcp.
• Results from operating activities stood at CAD 19.151 million, significantly higher than CAD 6.058 million in pcp. The period was marked by lower administrative and selling expenses (CAD 7.956 million v/s CAD 8.460 million in pcp) coupled with a decline in distribution expense (CAD 4.344 million v/s CAD 4.872 million in pcp), partially offset by higher cost of sales (CAD 184.478 million v/s CAD 179.736 million in pcp).
• Adjusted EBITDA was recorded at CAD 21.375 million, higher than CAD 16.522 million in pcp.

Source: Company Report

• Net earnings stood at CAD 10.778 million, higher than CAD 0.965 million in Q2 FY20, supported by higher operating income coupled with lower finance costs (CAD 4.383 million v/s CAD 4.569 million in pcp).

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The sugar industry is cyclical in nature, which might result in a lower sales volume and would affect the company’s performance.

Valuation Methodology (Illustrative): Price to Earnings based

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

Stock Recommendation:

During Q2FY21, free cash flow stood at CAD 46.670 million on a trailing twelve month basis, as compared to CAD 35.588 million in pcp, which is a key positive.       

 Source: Company Presentation

The group is focusing on investing across profitable assets and facilities in order to increase yield and to improve customer experience through innovation, which would further contribute to improved business prospects. We have valued the stock using the Price to Earnings based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered industry (Consumers & Cyclicals) mean on an NTM basis. Based on technical analysis, the stock has support at CAD 4.5 level. Hence, considering the aforesaid facts and current price movement, we recommend a 'Speculative Buy' rating on the stock of RSI at the closing market price of CAD 5.66 on May 10, 2021.

*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 May 10, 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.