Exco Technologies Limited

Exco Technologies Limited (TSX: XTC) is engaged in designing and development of dies, moulds, components and assemblies, and consumable equipment for various industries such as diecast, extrusion, and automotive industries. The Company operates in business segments, namely, Casting and Extrusion segment and Automotive Solutions segment.

Q3FY20 Financial Highlights: XTC declared its quarterly results, wherein revenue stood at CAD 70.962 million as compared to CAD 119.944 million in the previous corresponding period (pcp). The decline was primarily driven by a drastic decline in the sales from Automotive Solutions segment (down by ~60% y-o-y) combined with a 13% y-o-y dip in the sales of casting and extrusion segment. Reductions in the Automotive market, during the quarter, was primarily driven by the tepid automotive demand and standstill production levels across the key markets as a result of COVID-19 pandemic. Sales within the Casting and Extrusion segment held up better during the quarter amidst the current market conditions, and there was an uptick within the Large Mould group. Adjusted EBITDA stood lower at CAD 4.68 million as compared to CAD 14.483 million in pcp. The Company posted a net loss of CAD 848 million as compared toa 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: The Automotive sector is going through turbulent times in the recent past, and 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.

Stock Recommendation: The stock of XTC corrected 13% so far this year due to a challenging auto sector scenario coupled with a tepid industrial and construction activities. The Business caters to the Automotive sector and to several industrial & construction sectors, and due to the pandemic, most of the sectors witnessed a major setback, which has dampened the demand of the products. However, the group outperformed the industry in both the segment. In the automotive segment, outperformance was primarily attributable to the sale of the accessory product to OEM’s in North America. In the Casting and Extrusion segment, outperformance was aided by multi-plant footprint and harmonized manufacturing methods at several locations. The Company took prompt action at Mexico facilities, by temporarily laying off workers and controlling its costs structure etc. Further, the Automotive segment showed sign of revival during the month of June 2020, and we believe the industry is on the verge of recovery. 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 carrying a dividend yield of 5.49%, which Is lucrative amidst the current interest rate scenario. On the valuation front, the stock is trading at a significant discount to the industry (Machinery, Tools, Heavy Vehicles) median. The stock is trading at a forward EV/Sales multiple of 0.6x against the industry median of 1.7x. On Price to Earnings parameter, the stock is available at 11.2x against the industry median of 20.8x. Hence, considering the aforesaid facts and risk involved, we recommend a ‘Speculative Buy’ recommendation on the stock at the closing market price of CAD 6.92 on August 20, 2020.

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

Intertape Polymer Group Inc.

Decent Increase in Net Earnings and Cash Flows: Intertape Polymer Group Inc. (TSX: ITP) manufactures and sells a variety of packaging products. The firm's primary product categories include tapes, films, and woven coated fabrics. As on 20 August 2020, the market capitalization of the company stood at ~CAD 935.89 million.

Quarterly Performance (For the Period Ended 30 June 2020): During the quarter ended 30 June 2020, the company witnessed strong demand and an accelerated momentum in the e-commerce market, which enabled the business to deliver revenue 10% above and adjusted EBITDA 28% above the respective midpoints of the forecast. During the quarter, revenue of the company stood at USD 267.8 million and gross margin went down from 21.9% to 21.1%. This was mainly due to a decrease in volume/mix and lower selling prices and the unfavorable impact of unabsorbed overhead costs related to production slowdowns. In the same time span, net earnings of the company increased by USD 8.3 million to USD 14.8 million primarily due to decrease in selling, general and administrative expenses and Cash flows from operating activities increased USD 8.6 million to USD 40.5 million due to an increase in cash flows from working capital items.

Quarterly Financial Highlights (Source: Company Reports)

Key Risks: The company is exposed to a variety of risks including risks from COVID-19; the Company's ability to maintain and improve quality and customer service; anticipated trends in the Company's business; anticipated cash flows from the Company's operations; availability of funds, etc.

Outlook: The company expects that the strength in e-commerce demand and its sustainability may result in growth in carton sealing and protective packaging applications. It further expects its capital expenditure to be in the range of USD 30 million and USD 40 million.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: ITP retains a decent balance sheet with substantial liquidity providing the company with the flexibility. As per TSX, the stock of ITP is inclined towards its 52-weeks’ high level of CAD 18.70 but retains potential for growth. The company will pay its interim dividend of USD 0.1475 on 30 September 2020. The stock of ITP gave a return of ~33.33% in the past three months and a return of ~6.37% in the past one month. We have valued the stock using the price to cash flow multiple based relative valuation and have arrived at a target price of lower double-digit upside (in percentage terms). Considering the current trading levels, decent returns in the past three months, resilient financial position and positive long-term outlook, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 15.86, down by 0.63% on 20 August 2020.

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

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