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 Highlights:

• Price Hovering above the long-term moving average: The FTT stock is trading in an uptrend since September 2020, while it gained handsomely by ~54% and ~68%, respectively, in the last nine months and one year, respectively. Moreover, the stock closed above the 150-days and 200-days exponential moving average (EMA), indicating a bullish pattern.         

Technical Analysis by Kalkine Group

• Positive Guidance: The management highlighted strong demand across the equipment segment and anticipate that it would exceed FY19 performance, despite a sluggish economic outlook. Moreover, the group expects decent growth across the key markets. FTT expects EBITDA to free cash flow conversion of ~50%, while SG&A in terms of revenue is expected at around 17%.

Q1FY21 Financial Highlights:

• FTT announced its quarterly result, wherein the company posted total revenue of CAD 1,596 million, slightly higher than CAD 1,558 million in the previous corresponding period (pcp). The increase was driven by strong growth from new equipment and used equipment segment, partially offset by a slide in income from product support (CAD 887 million v/s CAD 934 million in pcp).
• Gross profit was down slightly at CAD 407 million, from CAD 418 million in pcp, due to a higher cost of sales (CAD 1,189 million v/s CAD 1,140 million in pcp).
• Earnings before finance costs and income taxes stood at CAD 108 million, increased from CAD 94 million in Q1FY20. The growth was supported by lower selling general and administrative expenses (CAD 314 million v/s CAD 325 million in pcp) coupled with inclusion of other income amounting to CAD 15 million.
• Net income stood higher at CAD 70 million, as compared to CAD 54 million in pcp, supported by slightly lower finance costs.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risk: Due to the extended restrictions and lockdown measures, the company’s performance might be impacted due to sluggish demand across the heavy machinery and vehicles segment, which would subsequently take a toll on the overall performance of the company.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The group reported the backlog of CAD 1.2 billion at the end of Q1FY21, reflecting a growth of 57% over Q4FY20, supported by strong equipment order intake across construction, coupled with additional orders from the HS2 project. Additionally, a significant backlog of power system projects for data centre customers also supported the growth. In FY21, the group expects that its growth would be driven by improved construction activities coupled with a strong upcycle from the mining activities. Notably, the group extracts more than 70% of its revenue from the mining sector. 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, Deere & Co etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 31.25 on June 01, 2021.

One-Year Technical Price Chart (as on June 01, 2021). Analysis by Kalkine Group

GDI Integrated Facility Services Inc.

GDI Integrated Facility Services Inc. (TSX: GDI) is engaged in the facility services sector and operates through segment includes Janitorial Canada, Janitorial USA, Technical services and Complementary Services.

Key Highlights:

• Strong Bullish Uptrend: The stock of GDI made a strong momentum and appreciated ~35% and ~58% in the last nine months and one year, respectively and maintained the momentum from July 2020. The stock closed above the long-term exponential moving average (EMA) of 200-days and 100-days, which suggest a strong bullish trend.

Technical Chart Analysis by Kalkine Group

• Reduction in Debt: In the recent few quarters, the company has constantly reduced its total debt, which is a key positive and indicates higher financial flexibility. Notably, total debt stood at CAD 189.6 million in Q1FY21, significantly lower than CAD 264.4 million in Q1FY20. A lower debt is a healthy sign, and it reduces interest expense as well.

Q1FY21 Financial Highlights:

• GDI announced its quarterly results, wherein the company reported revenue of CAD 383.601 million, higher than CAD 354.852 million in Q1FY20. The increase was driven by the positive impact of Acquisitions coupled with the depreciation of the U.S dollar relative to the Canadian dollar.
• Operating income were reported at CAD 27.237 million, surged from CAD 8.542 million in pcp, supported by higher revenue, while a higher cost of services (CAD 295.472 million v/s CAD 288.916 million in pcp), and increase in selling and administrative expenses (CAD 56.130 million v/s CAD 47.234 million in pcp) remained a drag.
• Net income grew to CAD 13.076 million, from CAD 4.302 million in pcp, supported by higher operating income, while a higher net finance expense (CAD 8.861 million v/s CAD 0.770 million in pcp), coupled with a higher Income tax expense (CAD 5.300 million v/s CAD 3.470 million in pcp) acted as a drag.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Due to any unprecedented market challenges on account of extended Government restrictions, the operations might get impacted. The group reported an increase in its input costs like Cost of services, Selling and administrative expenses etc., the continuation of the above trend is likely to dampen the company’s profitability and margins.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The company reported an Adjusted EBITDA of CAD 33.5 million, compared to CAD 20.0 million, reflecting an increase of 67.2% on y-o-y basis. Moreover, the adjusted EBITDA margin improved 310 bps from Q1FY20 to 8.7%. Moreover, despite the current sluggish economic growth, the company successfully increased its cash from operations to CAD 52.764 million, significantly higher from CAD 20.198 million in pcp, supported by higher net income, coupled with improved working capital management. We have valued the stock using P/E based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered industry (Professional & Commercial Services) mean on an NTM basis. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of GDI at the last closing price of CAD 51.21 on June 01, 2021.

One-Year Technical Price Chart (as on June 01, 2021). Analysis by Kalkine Group

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

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