Linamar Corp

Linamar Corp (TSX: LNR) is a Canada-based manufacturing company that makes powertrains and drivelines for vehicle and power generation markets. The group operates under two business segments: Transportation and Industrial.

Key Highlights

• Recovery in global light vehicle markets: The market dynamic for light vehicles portrays a positive change, which is crucial for the company. China sales increased by 27% on YoY basis in January 2021, while it is expected to increase by 6% for the entire year. Despite the second wave of COVID related lockdowns, the company expects sales to increase by 10% in Europe, while US sales is expected to grow by 11%. 

Source: Company

• Healthy cash flows: On the back of improved market dynamics, the company posted healthy cash flow numbers of CAD 1.19 billion in FY2020, against CAD 703.6 million in 2019. The management expects that all future operating capital expenditures would be financed by cash flow from operations, which is impressive and commendable.

Source: Company

• Reducing debts: The company minimized its long-term debts to CAD 725.88 million as of December 31, 2020, against CAD 1.87 billion in the previous corresponding period. Lower debt would further strengthen its bottom line, and based on current estimates, the company expect net debt to EBITDA to continue to improve by the end of 2021.

Source: Company

• Robust liquidity: The Company’s financial condition remains solid, given its strong balance sheet. The cumulative liquidity stood at CAD 1.63 billion on December 31, 2020, consisting of cash and cash equivalents of CAD 861.1 million. Furthermore, the group believes that current liquidity is sufficient to meet the near-term requirements.

Financial overview of Q4 2020 (in thousands of Canadian dollars)

Source: Company

• Sales in Q4 2020 stood at CAD 1,704.8 million, increased by CAD 88.7 million, against CAD 1,616.1 million in Q4 2019. The revenues got support from higher sales from transportation segment, which increased by 8.5%. This was partially offset by the industrial segment where sales decreased by 6%.
• Operating Earnings increased to CAD 155.4 million, compared to CAD 79.3 million in pcp. The rise in operating income was primarily due to the low cost of sales, coupled with higher sales.
• Net earnings increased to CAD 113.1 million in Q4 2020, compared to CAD 49.7 million in pcp. The rise in net earnings was primarily due to the above-stated reasons, coupled with lower interest expenses, partially offset by higher income tax provisions. 

Risks associated with investments

The company is prone to many risks associated with the nature of its business which could hamper the performance. Some of these risks include fall in demand from automobile manufacturers, 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

During Q4 2020, the Company experienced strong sales and transportation market share gains with content per vehicle growth in North America and the Asia Pacific. There has been a strengthening return in volumes as automotive production in China grew. Moreover, the Company expects a 10% and 11% increase in European market sales and the US, respectively, for 2021. We believe that the industry had seen the bottom from the volume perspective, and the Company is looking forward to the broader industry and economic recovery. The Company's new business wins are maintaining a healthy launch book of CAD 3.8 billion, which is commendable. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 78.76 on March 22, 2021. We have considered Magna International Inc, Martinrea International Inc, TFI International Inc, etc. as the peer group for comparison.

1-Year Price Chart (as on March 22, 2021). Source: Refinitiv (Thomson Reuters)

InterRent Real Estate Investment Trust

InterRent Real Estate Investment Trust (TSX: IIP.UN) is a real estate investment trust focusing on the acquisition, ownership, management, and repositioning of multi-residential properties. 

Key highlights 

• Robust operating matrix: The average monthly rent for December 2020 increased to CAD 1,315 per suite from CAD 1,260 in December 2019, reflecting an increase of 4.4%. On the Same Property basis, the average rent increased by CAD 68 per suite to CAD 1,354 or up 5.3% over December 2019. The overall increase in average rent got benefitted by changes in property mix.

Source: Company 

• Steady occupancy rates along with rising average monthly rent: The group reportedoccupancy rate of 91.3% in Q4 2020, standing above the mark of 90%. This looks impressive considering the current economic condition. The group also witnessed sequential growth in the average monthly rent across the portfolio, which increased to CAD 1,315 per suite in Q4 2020 from CAD 1,302 in Q3 2020.

Source: Company 

• Rich rent collection:The group collected over 99% of October, November and December residential rents, and the current trend for January and February is also in line with previous months. This trend represents that macros are improving gradually. 

• Healthy liquidity:Based on healthy rent collection and increased average monthly rent, the group maintains robust financial health. The group reported an increase in the Funds from Operations by 11% to CAD 62.8 million in FY2020 and holds a cash balance of CAD 51.6 million as of December 31, 2020, besides the aggregate credit limit of CAD 292 million. 

Financial overview of FY2020 (In Thousands of CAD)

Source: company 

• For FY 2020, the company reported revenue of CAD 160 million, increased by CAD 14.7 million, against CAD 145.3 million in the previous corresponding period. The increase in revenue was primarily due to higher average monthly rent per suite at CAD 1315 from CAD 1260, a year ago.

• NOI stood slightly higher at CAD 102.1 million, compared to CAD 96.1 million in the previous corresponding period. 

• Net income in FY 2020 decreased by CAD 234.2 million and stood at CAD 150.6 million, against CAD 384.9 million in 2019. The decline was due primarily to decline in fair value gain on investment properties by CAD 283.1 million. 

Risks associated with investment

A fall in the consumer disposable income might lead to an increase in the deferred rent, which could take a hit on the company’s profitability. 

Valuation Methodology (Illustrative): Price to Earnings 

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

Stock recommendation

Recently, the group purchased a building comprised of 114 suites in St. Catharines, as well as it acquired 50% interest in 15 properties (614 suites) in Metro Vancouver. The group is also committed to purchasing a building with 157 suites in St. Catharines, for CAD 31.4 million and two buildings with 45 suites in Vancouver, for CAD 18.9 million in April 2021. We believe that the REIT would get a unique opportunity to achieve critical mass and scale in Vancouver, Canada's third-largest rental market. With the strong cash flows and healthy rent collection rates, the REIT demonstrated the business's resiliency. Furthermore, the REIT believes that when immigration returns to more normalized levels and post-secondary institutions resume in-class learning, strong rental demand would return and drive down vacancy, and upward rental pressure would resume. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 14.59 on March 22, 2021. We have considered European Residential REIT, Morgaurd North American Residential RIET etc., as the peer group for the comparison.

1-Year Price Chart (as on March 22, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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