Linamar Corporation

Linamar Corporation (TSX: LNR) is engaged in the manufacturing of powertrains and drivelines for vehicle and power generation markets and operates under two business segments, namely, Transportation and Industrial. Within the Transportation segment, the company develops and manufactures precision metallic components, modules and systems used in vehicles and power generation machines. At the same time, the industrial segment is focused on mobile industrial equipment, including aerial work platforms and telehandlers.

Key Updates:

• Lower Debt component: At the end of Q3FY20, the group reported a decline in long term debt at CAD 0.843 million, as compared to CAD 1.86 billion in FY19. The decline in the debt component augurs well for lower finance costs and is likely to boost profitability as well. Notably, finance expense stood lower at CAD 1.546 million, as compared to CAD 11.130 million in Q3FY19.
• Impressive Guidance: For FY20, the management expects a revival in operations from the Rest of the World Aerial Work Platform (ROW AWP) market, driven by improved traction from China. On the other hand, Agriculture Market is likely to be supported by higher commodity prices and improved farm net income. Moreover, for FY21, LNR expects its agriculture segment to grow above FY20 levels, driven by improving order intake. As per the sales and net profitability (for FY21) is concerned, the group expects a double-digit growth from FY20, while free cash flow is expected to remain strongly positive, driven by strong momentum from industrial segment.

Source: Company Presentation

Q3FY20 Financial Highlights:

• LNR announced its quarterly results, wherein the group posted sales of CAD 1,637.4 million, as compared to CAD 1,740.0 million in the previous corresponding period (pcp). The decline in sales is primarily attributed to adverse conditions due to the global COVID-19 pandemic.
• The group’s EBITDA stood at CAD 300.6 million, grew 22.3% on y-o-y basis, supported by strong EBITDA growth from Transportation and Linamar segments, coupled with a better performance from Industrial operations.
• Net earnings stood higher at CAD 125.5 million, as compared to CAD 98.2 million in the previous corresponding period.
• Cash and cash equivalents stood at CAD 570.086 million at the end of Q3FY20, while total assets were reported at CAD 7,439.357 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Aerial Work Platform across North America has remained weak during FY20, while combined retail sales were down across Canada. Continuation of the above trend would likely to dampen the growth prospects of the company.

Valuation Methodology (Illustrative): P/E based valuation

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

Stock Recommendation:

The group expects Global Light Vehicle production to increase by ~13% in FY21 from FY20, which would support the company’s top-line. Moreover, positive market trends within the industrial and agricultural segments would likely to support the company’s upcoming performance. Moreover, the group has more than CAD 1.3 billion of liquidity, supported by strong cash from operations, which stood at CAD 944.517 million in 9MFY20, higher than CAD 665.009 million, a year ago. Moreover, the stock appreciated ~64% and ~104% in the last six months and nine months, respectively and closed above the 100-days, 150-days and 200-days simple moving average, indicating a bullish price trend. We have valued the stock using the 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 Martinrea International Inc, Magna International Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 69.95 on February 17, 2021.

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

Morguard Corp

Morguard Corp (TSX: MRC), is a real estate company that acquires, owns, and develops commercial, multi-unit residential and hotel real estate properties in Canada and the United States.

Key highlights

• Improved rent collections: In Q3 2020, the group witnessed higher rent collection of 92.3%, compared to 86.1% in Q2 2020, which is impressive. We believe the momentum to continue in the coming days, supported by the improved retail and office occupancy rates.

Source: Company

• Steady occupancy levels: Despite a slowdown in the overall economy, the group posted a steady occupancy rate in Q3 2020, which remained above the of 90%.

Source: Company

• Implementing cost management to improve free cash flows: For minimizing the impact on free cash flows due to pandemic, the company is working to reduce operating expenses and capital expenditures. These initiatives are likely to help the group in delivering a healthy margin. 

• Ample liquidity: The company is maintaining a decent liquidity of approximately CAD 688 million, comprised of CAD 230 million in cash and CAD 458 million available under its revolving credit facilities. The current liquidity position seems sufficient for the group to fund its working capital requirement. To further enhance its liquidity, the group has narrowed down its capital expenditure to ensure the availability of resources. 

Financial overview

Source: Company

• In Q3 2020, the company reported a decline in total revenue to CAD 251.46 million, against 298.92 million in the previous corresponding period. The decrease in revenue was primarily due to lower performance from the hotel properties, which generated CAD 21.78 million in the reported quarter against CAD 65.52 million in pcp, primarily due to Covid-19.
• The group's net operating income in Q3 2020 stood at CAD 130.26 million, against CAD 150 million in pcp, the decline was primarily due to higher property operating expenses, partially offset by lower hotel operating expenses.
• Net loss in Q3 2020, clocked by the group stood at CAD 37.6 million, against a loss of CAD 2.29 million in the previous corresponding period. The rise in net loss was primarily due to higher loss on fair value amounting to CAD 102.38 million.

Risks associated with investment

The revenue and operating results of the Company depend significantly on the occupancy levels and rent collection. Any fluctuations in occupancy levels and rent collection would affect the overall performance.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

Gradually the economy has started the revival process as the improvement signs are now visible. The job market is strengthening slowly, which depicts the return of consumer and investors’ confidence. The residential segment of the group is continuously performing well and reporting stable numbers. Furthermore, we believe the segment would continue to improve as the per capita income would improve. The company has a diversified, resilient business model and reports impressive rent collection at the rate of 92.3% in Q3 2020, compared to 86.1% in Q2 2020. Therefore, based on the above rationales and valuation, we have given a “Buy” rating at the closing price of CAD 110.41 on February 17, 2021. We have considered Crombie Real Estate Investment Trust, Mainstreet Equity Corp, NorthWest Healthcare Properties REIT etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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