Finning International Inc.

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

Key Highlights:

• Higher backlog: At the end of Q2FY21, the company reported an impressive backlog of CAD 1.4 billion, surged from CAD 1.2 billion in the previous quarter. The growth was supported by new order intake from the mining segments within the Canada and South America geographies. Moreover, a revival in construction activities across the geographies in which FTT operates also supported the above growth.
• Positive outlook: The group expects strong construction activities for the rest of FY21, supported by higher public and private investments within the infrastructure sector. This is expected to lead higher order book for the company in the coming quarters. Moreover, strong metal prices on the backdrop of higher demand dynamics are likely to support the mining activities, which would eventually drive the demand for heavy-duty machinery and parts.
• Lower leverage than the industry: The company maintains a healthy debt to equity as compared to its peers, which is a key positive. Notably, debt to equity in Q2FY21 stood at 0.72x, lower than the industry median of 0.87x. Moreover, long-term debt to total capital stood at 29.1% in Q2FY21, lower than the industry median of 31.7%.
• Management Update: Tim Ferwerda has been promoted to the role of Managing Director for the company’s UK & Ireland business, from the earlier role of Sales, Marketing and Distribution in the UK & Ireland.

Q2FY21 Financial Highlights:

• FTT declared its quarterly result, wherein the group reported total revenue of CAD 1,845 million compared to CAD 1,419 million in the previous corresponding period (pcp). The increase was driven by strong growth from the new equipment, used equipment segment, along with improved performance from the product support segment.
• Gross profit jumped to CAD 449 million, from CAD 344 million in pcp, due to higher revenue, partially offset by higher cost of sales (CAD 1,396 million v/s CAD 1,075 million in pcp).
• Earnings before finance costs and income taxes stood at CAD 137 million, soared from CAD 52 million in Q2FY20.
• Net income stood at CAD 91 million compared to CAD 18 million in pcp, supported by lower finance costs.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risk: Due to the extended restrictions and lockdown measures, demand across the heavy machinery and vehicles segment may decline, which would subsequently take a toll on the overall performance of the company.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The group has increased its annualized dividend by 10% to CAD 0.90 per share, which is a key positive. Notably, the stock of FTT carries a dividend yield of ~2.86%, which looks decent considering the ongoing interest rate scenario. We have valued the stock using the price to earnings based relative valuation method and have arrived at a single-digit upside (in percentage terms) upside. For the said purposes, we have considered peers like Terex Corp, Deere & Co . Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 31.46 on October 01, 2021.

One-Year Technical Price Chart (as on October 01, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Altius Minerals Corporation

Altius Minerals Corporation (TSX: ALS) is engaged in the business of obtaining diversified mining royalty. It holds interests in mining operations that produce metals and minerals such as copper, zinc, nickel, cobalt, gold, silver, and potash. 

Key Highlights:

• Strong profitability margins: The company reported an impressive profitability margin with EBITDA margin and operating margin at 78.8% and 74.5%, respectively, in Q2FY21. These were higher than the industry median of 41.3% and 27.1%, respectively. Net margin during the quarter stood at 68.6%, as compared to the industry median of 15.9%.
• Elevated realization rate supported the company’s performance: The company reported higher realization prices from its copper, zinc and potash segment, which has resulted in elevated revenue in the recent past. In H1FY21, the company reported its revenue at CAD 39.666 million, which was higher than CAD 29.314 million in pcp. Moreover, a higher average price of thermal (electrical) coal, along with higher royalty volumes, also supported the above growth.
• Rise in cash balance: The company reported a cash balance of CAD 115.877 million at the end of Q2FY21, which was significantly higher than CAD 30.637 million in Q2FY20.
  

Q2FY21 Income Statement Highlights:

• In Q2FY21, ALS reported revenue of CAD 21.198 million, jumped from CAD 10.270 million in the previous corresponding period (pcp). The growth was primarily supported by elevated revenue from the Iron ore segment coupled with higher income from the base metals segment.
• The period was marked by higher general and administrative expense, an increase in the cost of sale and a higher exploration and evaluation assets abandoned or impaired costs. Amortization and depletion costs also stood higher at CAD 5.603 million, as compared to CAD 3.408 million in pcp.
• Earnings before income taxes stood at CAD 16.478 million, jumped from CAD 4.021 million in pcp. Interest on long-term debt stood lower than pcp, while the company reported a gain on reclassification of an associate amounting to CAD 7.595 million.
• The group posted its net earnings of CAD 14.549 million, as compared to the CAD 4.105 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s operations are dependent on commodity prices, and volatility in the prices would dampen the company’s overall performance.

Stock Recommendation:

The company showed exuberant financial performance in the recent past and posted adjusted EBITDA of CAD 17.622 million in H1FY21, higher than CAD 12.426 million in pcp. On the valuation front, the stock is available at an EV to Sales multiples of 8.2x on an NTM basis, as compared to the industry (Basic Material) average of 23.1x. Hence, considering the above facts, we give a ‘Hold’ rating on the stock at the closing price of CAD 15.54 on October 01, 2021.

One-Year Technical Price Chart (as on October 01, 2021) Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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