Spark Power Group Inc

Spark Power Group Inc (TSX: SPG) is independent provider of end-to-end electrical contracting, operations and maintenance services, and energy sustainability solutions to the industrial, commercial, utility, and renewable asset markets across North America

Key highlights

• Revenue at pre-pandemic level: The group reported quarterly revenue numbers, back to pre-pandemic levels, and the company presume to see the special rates of organic growth over the next several quarters. The company witnessed a contraction in its margins due to competitive pricing pressures and some job inefficiencies arising from COVID-19 restrictions. However, the management see an improvement on M-o-M basis, with further gains expected in the coming period.

Source: Company

• Renewables segment doing wonders: The Company’s renewables division is generating record revenues and growing faster than the industry. The Company completed the acquisition of One Wind that is included in the Renewables Segment and contributed CAD 10.8 million to the revenue increase in the third quarter of 2020.

Source: Company

• Liquidity: As on September 30, 2020, the company had a Bank indebtedness of CAD 20.4 million comprising CAD 15.4 million for running operations and CAD 5.0 million for capital expenditure. The group had additional borrowing capacity under the revolving line of credit and capital expenditure line of CAD 14.6 million. 

Financial overview of Q3 2020

Source: Company

• In Q3 2020 the company posted revenue of CAD 61.4 million, an increase of 18.0% as compared to CAD 52.0 million in Q2 2019. Canadian region sales were down by CAD 5.6 million or 10.0% in the quarter, while the US region sales increased CAD 4.8 million or 77.7%.
• Quarterly adjusted EBITDA reported by the company in Q3 2020 stood at CAD 9.0 million, increased by 9.2% as compared to CAD 8.2 million in the previous corresponding period.
• In Q3 2020, the company reported Net income of CAD 2 million, as compared to CAD 2.6 million in Q2 2019. An increase in interest expense and SG&A expenses were the main reason for dragging down the net income.

Risk associated with investment

If the second wave of novel virus arises, the business might witness a halt in its operational activities, which may dampen the performance. Other risks associated with the company include interest rate risk, liquidity risk and foreign currency risk.

Stock recommendation

The company remained fully operational, leveraging its diverse customer base that delivers revenue stability. While the re-opening of economies has commenced in many jurisdictions, the group reported robust performance in Q3 2020, despite the effect of the pandemic on the economy. From now on, we believe that the company would focus on areas like liquidity and maintaining service to customers, which can enhance the overall performance. With the re-opening of the economy, we expect a revival in the company’s order book in upcoming quarters. On the valuation front, the stock is available at EV/EBITDA of 5.33x on NTM basis, significantly lower than the industry average of 6.47x. Hence considering the recent operating performance, we recommend a ‘Speculative Buy’ on the stock at the closing price of CAD 1.52 on 12 November 2020.

SPG daily technical chart. Source: Refinitiv (Thomson Reuters)

NFI Group Inc

NFI Group Inc (TSX: NFI), formerly New Flyer Industries Inc, is a Canada-based bus and motorcoach manufacturer and parts distributor in North America, with approximately 32 fabrication, manufacturing, distribution and service centres located across Canada and the United States.

Key highlights

• Focus on Cost Reduction: The company is taking transformational initiative through which it expects to generate more than USD 65 million in annualized cost savings, an additional USD 10 million in Free Cash Flow, by the end of FY2022. These cost reduction initiatives will come into manner from a reduced number of business units, facility rationalization, and reduced overhead.
• Dividend: In Q3 2020 the company declared a quarterly dividend of CAD 0.2125 per common share. While the dividend payment reduced by 50%, the continued payment reflects the company’s confidence in the business while maintaining the financial health required to operate during this uncertain period.
• Liquidity: The company is having liquidity of is USD 414.5 million as on September 27, 2020. The group remains focused on to deleverage its balance sheet and is working closely with banking partners on an extended covenant relief package providing additional flexibility in 2021.

Financial overview

Source: Company

• Total Revenue generated by the Company in Q3 2020, decreased 8.5% to USD 664 million against USD 725 million in Q3 2019, due to the decline in vehicle deliveries. Aftermarket parts sales were also down by 10.6%
• Manufacturing Revenue in Q3 202 decreased by CAD 49.9 million, or 8.1% on Y-o-Y basis, primarily driven by lower deliveries of both transit buses and motor coaches, as the company lowered production volumes in response to public customer order deferrals and private customer order delays.
• Revenue from Aftermarket operations in Q3 2020 also decreased USD 11.6 million, or 10.6% on a Y-o-Y basis, as private operators were idling their fleets due to the COVID-19 pandemic.
• Cost of sales reported by the Company in Q3 2020 stood at CAD 617 million. Cost of sales as a percentage of revenue increased to 93% as against 88% on Y-o-Y basis, due to lower production volumes absorbing more fixed overhead on a per-unit basis.
• Losses from operations in Q3 2020 posted by the Company were USD 16.5 million compared to earnings of USD 25.2 million in Q3 2019.

Risk associated with investment

COVID-19 pandemic has affected the group’s operations and performance. Due to this, the company’s manufacturing operations were closed temporarily. Though, the group resumed manufacturing processes, further break out of the pandemic may result in a shutdown of facilities again, which would affect the overall performance. Many other risks are also associated with the group, which could affect their operations such as disruptions from the supply chain, and technological change, increased prices of raw materials and commodities, etc.

Valuation Methodology (Illustrative): Price to Earnings

All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

As most of the company’s vehicles are used for public transit, which remains a vital mode of transportation for millions of users, we expect the demand to return. However, the duration of the COVID-19 pandemic may delay new vehicles awards and delivery timing. The group is also taking transformational initiative of cost reduction, through which it expected to generate more than USD 65 million in annualized cost savings and an additional USD 10 million in Free Cash Flow, by the end of FY2022. The management of the group expects that 2021 financial results will see significant improvement over fiscal 2020. Therefore, based on the above rationale and valuation, we have given a ‘Speculative Buy’ rating at the closing price of CAD 15.83 on November 12, 2020. We have considered Air Canada, Martinrea International Inc, Boyd Group Services Inc, Linamar Corp etc. as the peer group for the comparison.

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

Disclaimer

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