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. Some of their products are aluminum engine blocks, specialized products, suspensions, chassis modules and components, and fluid management systems for fuel, power steering and brake fluids.

Key highlights

• Expanding wings with the acquisition:On March 2, 2020, the Company made an acquisition of structural components for passenger cars business of Metalsa S.A. The operations acquired by the Company specialize in a wide variety of metal forming technologies which further promotes Martinrea’s lightweight strategies. Through this acquisition, the Company has added six more manufacturing facilities to its side. These facilities are in Germany, the United States, Mexico, South Africa, and two in China. The acquisition helped the group in adding customers like Daimler, BMW, Volkswagen, and Audi.
• Increase in Dividend: The company decided to increase the annual dividends by 11% to CAD 0.20 per share, to be paid in four quarterly instalments of CAD 0.05 per share, commencing at the beginning of 2020.
• Enhancing liquidity position: The Company improved its liquidity position by increasing the revolving credit lines by another CAD 280 million. As of June 30, 2020, the Company had total liquidity of over CAD 500 million, which seems sufficient enough to meet the near-term requirement.

Financial Overview of Q2 2020

Source: Company

• The Company’s consolidated sales in Q2 2020, decreased by CAD 488.0 million or 51.4% to CAD 460.6 million as compared to CAD 948.5 million in the previous corresponding period (pcp). The group witnessed a weak demand due to the overall industry slowdown on account of COVID-19.
• The group reported a gross loss of CAD 12.5 million, as compared to a gross profit of CAD 154.8 million on Y-o-Y basis, primarily due to low revenue and high cost of sales and higher depreciation.
• The Company posted a net loss of CAD 147 million in Q2 2020 as against a net profit of CAD 28.1 million on Y-o-Y basis.

Geographical sales bifurcation

Source: Company

Risk associated with investment

The company is prone to many risks associated with the nature of its 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, technological change, increased prices of raw materials and commodities, etc.

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock recommendation

The company reported a phased restart of the manufacturing facilities and dependent functions in May and June 2020. The trend continued into the third quarter as OEMs began producing vehicles, which is a positive sign. The group believe that the industry had seen the bottom from the volume perspective and looking forward to the broader industry and economic recovery. The company also expects a healthy sale through the new customers those were added via acquisition. Further, the company enhanced its liquidity position by increasing the revolving credit lines, which seems sufficient to meet the working capital requirement. Therefore, based on the above rationales and valuation, we have given a ‘Speculative Buy’ rating at the closing price of CAD 10.31 on November 3, 2020. We have considered Magna International Inc, Linamar Corp, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Whitecap Resources Inc

Whitecap Resources Inc (TSX: WCP) operates in the production of crude oil and natural gas in western Canada. The group also acquires assets with discovered petroleum initially in place and low current recovery factors.

Key Highlights

• Impressive Production Growth: Over the years, the company has enhanced its production levels, which is a key positive. Historically, during FY10 to FY19, the business reported a CAGR of 12% in per share production.                                           

Production per share trend (Source: Company Presentation)

Stable Production YTD: For the nine months ended FY20, the company has maintained its production levels at 70,300 boe/day as compared to 69,835 boe/day in the previous corresponding period (pcp). ~77% of the company’s production comes from crude oil.                            

Production Breakup (Source: Company Presentation)

• Stable Fund Flow: WCP maintains a stable fund flow from operations during the last decade, which signifies business resilience and efficient capital management. Fund flow per share recorded ~16% CAGR during FY10 to FY19, which is commendable. The company’s premium assets showed positive funds flow even in a low crude oil price environment, which is noteworthy.                            

Fund Flow historical trend (Source: Company Presentation)

• Consistent dividend payment: The group has a decent track record of dividend payment. The company maintained its dividend distribution despite a challenging operating environment. The company announced a monthly dividend of CAD 0.01425 per common share, payable on November 16, 2020.

Q3FY20 Financial Highlights:

• Q3FY20 revenue stood at CAD 210.507 million, lower than CAD 292.606 million in Q3FY19. The decline was primarily attributed to lower realized prices (CAD 40.47/bbl vs CAD 52.76/bbl in pcp) on account of the COVID-19 pandemic and the weakening global demand.
• Income before taxes stood at CAD 17.920 million, significantly lower than CAD 52.591 million in Q3FY19. The decline was primarily due to a falling income, partially offset by a decline in the total expense.
• Net income stood at CAD 12.835 million, against CAD 42.277 million in Q3FY19.                     

Q3FY20 Financial Highlights (Source: Company Reports)

Risk: The company’s revenue is linked to the prices of crude oil. Any volatility in crude oil prices is likely to affect the realization prices, which would subsequently hinder the company’s revenue and margins.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation

The company has a strong balance sheet and ample liquidity levels and focuses on optimizing costs while operating safely and responsibly. The company realized crude oil hedging gains of CAD 10.1 million in Q3FY19 and CAD 80.3 million year-to-date. The company maintains a consistent dividend payout, supported by significant free cash flow. At the last traded price, the WCP stock was offering an impressive dividend yield of ~6.58%, which is lucrative amid a low interest rate environment. With the resumption of manufacturing and industrial activities, we expect demand for oil to improve gradually, which would support the realization prices. We have valued the stock using Price to CF value-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered TORC Oil & Gas Ltd, Crescent Point Energy Corp etc., as a peer group. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 2.60 on November 03, 2020.

WCP Daily Technical Chart (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.