Exco Technologies Limited

Exco Technologies Limited (TSX: XTC) designs and manufactures moulds, dies, components and assemblies, and consumable equipment which is used for several industries such as diecast, extrusion, and automotive industries. The Company operates through two business segments, namely, Casting & Extrusion segment and Automotive Solutions segment.

Q3FY20 Financial Highlights: Exco Technologies announced its third-quarter results, wherein revenue stood at CAD 70.962 million as compared to CAD 119.944 million a year ago. The decline was primarily attributable to a drastic fall in Automotive Solutions revenue, which was down by ~60% y-o-y coupled with a 13% lower revenue from the casting and extrusion segment. There was a sectorial weakness due to a lukewarm automotive demand coupled with standstill production levels across the key markets as a result of COVID-19 pandemic. Furthermore, the Large Mould group contributed healthily as the programs of this group tend to be relatively long cycle and continued to advance despite the vehicle production stoppage at all OEM’s served by the group. Adjusted EBITDA stood lower at CAD 4.68 million against CAD 14.483 million in the previous corresponding period (pcp). The group posted a net loss of CAD 0.848 million as compared to a profit of CAD 7.477 million in pcp, due to a declining performance from all the segments, partially supported by the lower income tax rate.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to COVID-19 pandemic, the Automotive segment took a hit due to lower consumer spending across the globe, which led to a fall in the Original Equipment Manufacturers (OEM) production levels. Continuation of the above trend would lead to the suppressed top line, as the Company derives a significant amount of revenue from the segment. Further, the second wave of the novel virus might affect the group’s performance.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation: The stock of XTC corrected ~16% so far this year, due to a weak industry performance in the recent past. The company has a diverse operation, strong market positions across its various businesses, and the company generated positive free cash flow in the recent past which is commendable looking at the current economic jolt. Extrusion group sales performed better than the industry, supported by the multi-plant footprint and harmonized manufacturing methods implemented across the various manufacturing locations. The Economic activity picked up towards the latter half of the quarter, with June sales showing improved traction over May sales, which encouraging. Going forward, the group expects that combined OEM production levels across Europe and North America are likely to normalize at around 90% of previous year levels and is likely to improve in the coming days. We expect the demand for the group’s offerings to improve in the near to medium term as the governments across the states started easing the restrictions and allowing industrial and manufacturing activities to resume. Despite the challenging time, the group continued to pay the dividend, which is encouraging from an income investor’s standpoint. At the last traded price, the stock was offering a healthy dividend yield of 5.69%, which is impressive looking at the current interest rate structure. We have valued the stock using P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like China Automotive Systems Inc, Strattec Security Corp, Xpel Inc etc. Hence, considering the above-mentioned facts, current price levels, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 6.70 on September 9, 2020.

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

Sierra Metals Inc

Sierra Metals Inc (TSX: SMT) is a precious and base metals producer in Latin America which is engaged in the acquisition, exploration, extraction, and production of mineral concentrates consisting of silver, copper, lead, zinc and gold.

Q2FY20 Financial Highlights: Sierra Metals announced its second quarter results, wherein revenue stood at USD 41.901 million, as compared to USD 50.673 million in Q2FY19, due to a lower mining and production activities on account of COVID-19 coupled with a decline in the metal price on account of the current pandemic. The Company posted a 13% and 26% y-o-y fall in the copper and zinc prices, while lead fell 11% from the previous corresponding quarter (pcp). Meanwhile, amidst all the negatives, the top-line was supported by the improved realized price of silver and gold. Adjusted EBITDA, during the quarter, stood at USD 12.595 million as compared to USD 12.558 million, due to lower operating costs, partially offset by lower revenues. Net income came in at USD 154 million as compared to a net loss of USD 158 million in Q2FY19. Cash flow generated from operations before movements in working capital stood at USD 13.184 million higher than USD 12.773 million in Q2FY19, majorly driven by lower general and administrative costs on account of COVID 19 pandemic. The quarter was marked by mine development activities across the Cusi property which totaled at 146.0 meters to stope preparation in various zones within the mine.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks:  Falling metal prices on account of a gloomy economic scenario might drag the realization prices, which is likely to dampen the overall income of the company.

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 corrected ~7% so far this year. During the end of July, the company reported that it had restarted operations and production across its Cusi Silver Mine in Mexico and the company is targeting average throughput of 1,200 tonnes per day by the end FY20, which is impressive. Furthermore, the company expects to continue development and infrastructure improvements across the Bolivar mine and is targeting throughput close to 5,000 tonnes per day before the end of the year, which augurs well for additional income. The company expects FY20 production of copper equivalent within the range between 110.1 million pounds to 122.3 million pounds while silver equivalent production is expected between 17.4 million ounces to 19.4 million ounces. The company expects its zinc equivalent production in between 286.8 million pounds to 318.7 million pounds. The range remains lower than the original guidance stated earlier due to a production shutdown on account of COVID 19 pandemic. With the resumption of the mining activities along with a gradual increase in the demand, we expect an improvement in the metal prices which would further support the company's top-line in the coming days. The group is likely to benefit from the elevated gold prices as it derives a certain portion of its revenue from gold sales. During the last three months and six months, the stock made a stellar recovery and gained ~72% and ~36%, respectively. We have valued the stock using EV/EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Major Drilling Group International Inc, Karora Resources Inc and Forage Orbit Garant Inc etc. Hence, considering the above facts, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 2.03 on September 9, 2020.

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

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