Toromont Industries Ltd

Toromont Industries Ltd (TSX: TIH) is a Canadian industrial company, which operates through two segments, namely, Equipment Group and CIMCO. The Equipment Group derives major part of the revenue, which includes Caterpillar dealership and rental operation of construction equipment. On the other hand, CIMCO offers solutions for the design, engineering, fabrication, and installation of industrial and recreational refrigeration systems.

Key Updates:

• Growth in Backlogs: The Equipment segment reported backlog of CAD 373.0 million, 37% YoY growth while the CIMCO segment recorded backlog of CAD 184.4 million, a YoY growth of 51% at the end of FY20, which is anticipated to be realized as revenue in 2021. The growth in total backlogs was primarily attributed to power systems (grew 29%), construction (surged 38%) and mining (up by 17%) segments. 

• Higher margin than the Industry: The group showed a higher operational efficiency from the last two consecutive quarters, as compared to the industry median. During 4Q20, TIH reported EBITDA and operating margin of 17.0% and 12.8%, respectively v/s 16.8% and 12.2% during Q3 FY20. The Company’s reported margins were higher than the industry median of 13.2% and 10.9%, respectively. During Q4 20, TIH registered net margin of 9.0% v/s 8.4% in 3Q20. Additionally, the reported net margin was higher than the industry median of 6.4%.

FY20 Financial Highlights:

• Toromont Industries Ltd declared its full-year results of FY20, wherein the group posted revenue of CAD 3,478.897 million, as compared to CAD 3,678.705 million FY19. The decline in revenue was primarily attributed to lower income from the Equipment Group (5% y-o-y basis) and CIMCO (7% on y-o-y basis) segment due to lower economic activity levels on account of COVID 19 restrictions.
• Gross profit stood lower at CAD 835.746 million during FY 20 as compared to CAD 906.122 million in FY19. The decline in gross profit is mainly attributed to the higher cost of sales.
• The group’s operating income was recorded at CAD 372.434 million, declined from CAD 412.495 million in pcp, due to lower gross profit, while a decline in selling and administrative expenses (CAD 463.312 million versus CAD 493.627 million in pcp) partially supported the performance.
• Net earnings of the company were recorded at CAD 254.915 million, which stood 11% lower over FY19.
• The company reported a cash balance of CAD 591.128 million, while total assets were recorded at CAD 3,346.792 million.

FY20 Financial Highlights (Source: Company Report)

Risks: The company derives its majority income from infrastructure projects and other construction activities, which are directly correlated to the current health of the economy. In the recent past, the group witnessed a reduced operating activity from the mining segment due to COVID-19 restrictions. Continuation of the above trend would dampen the company’s overall performance.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

The company would continue to invest in information technology in order to align its dealership under one operating system, which would further improve and secure the remote access to the company’s distribution networks. Focus within the rental equipment and developing product support technologies would lead to improving remote diagnostics and telematics and is expected to contribute to the longer-term growth of the company, which is a key positive. We have valued the stock using the Price to CF-based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like WSP Global Inc, Stantec Inc etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 90.58 on March 16, 2021.

One year-Price Chart (as on March 16, 2021). Source: Refinitiv (Thomson Reuters)

Finning International Inc.

Finning International Inc. (TSX: FTT) is a dealer and distributor of heavy-duty machinery and parts and operates through the Caterpillar brand. FTT sells and rents Caterpillar machinery to the mining, construction, petroleum, forestry, and power system application industries.

Key Updates:

• Constant reduction in debt: In the recent past, the company reported a consistent reduction in the total debt, which is a key positive and provides higher financial flexibility. The company reported its total debt of CAD 1,616 million in Q4FY20, down by ~9%, ~17% and ~25%, respectively, from Q3FY20, Q2FY20 and Q1FY20, respectively. 

• Impressive outlook supported by a recovery in the sector: For FY21, the company expects a revival in its operations, supported by a higher capital expenditure budget by most of company’s clients. Moreover, support from the government for infrastructure projects would likely to boost the company’s order book. FTT further intends to maintain the operational efficiency and expects to deliver more than CAD 100 million of annualized cost savings, which would further support the company’s margins. The group targets to lower its SG&A expense to ~17.0% of revenue as compared to 20.9% in FY20.

Q4FY20 Financial Highlights:

• FTT declared its fourth-quarter results, wherein the company reported a 12.0% y-o-y decline in net revenue to CAD 1,551 million. The decline was primarily attributed to a significantly lower income from New equipment segment and Product support segment.

(Source: Company Report)

• Gross profit stood marginally lower at CAD 418 million, from CAD 428 million in Q4FY19.
• The quarter was marked by a lower SG&A expense (CAD 324 million, versus CAD 334 million in Q4FY19) and other income of CAD 14 million. The group witnessed a 9.0% y-o-y growth in EBITDA to CAD 185 million, while EBITDA margin improved to 11.9% from 9.7% in the previous corresponding period (pcp).
• FTT posted net income at CAD 72 million v/s CAD 50 million in Q4 FY19, reflecting a YoY growth of 44.0%.
• The group reported a cash and cash equivalent of CAD 539 million, while total assets stood at CAD 5,458 million.

     (Source: Company Report)

Risk: Due to the extended restrictions, the group’s performance might be hindered on account of tepid demand across the heavy machinery and vehicles segment, which may take a toll on the overall performance.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

The future performance is likely to be supported by strong recoveries in Chile and the UK, which is a key positive. Notably, the Chilean government announced USD 34 billion of public investment in infrastructure during 2020-2022 in order to bolster economic activities. Moreover, the outlook for copper, precious metals and other metals remains positive, backed by increased activity in the mining sector across Canada. Meanwhile, diamond mining activity is expected to return to full capacity, which is a key positive. The group is well positioned to assist the mining customers in the reduction of cost per ton, which subsequently leads to operating efficiencies through leveraging the company’s technology solutions. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers Wajax Corp, Cervus Equipment Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 32.67 on March 16, 2021.

One year-Price Chart (as on March 16, 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.