Gildan Activewear Inc.

Gildan Activewear Inc. (TSX: GIL) is a vertically integrated designer and manufacturer of basic apparel, including T-shirts, underwear, socks, and hosiery. The company’s primary market belongs to the sale of blank T-shirts to wholesalers and printers. The group also sells branded clothing through retail and direct-to-consumer channels. Brands include Gildan, American Apparel, Comfort Colors, and Gold Toe. 

Key Highlights:

• Strong Bullish Uptrend: The stock of GIL is trading in a strong uptrend since July 2020. Moreover, the stock closed above the long term simple moving average (SMA) of 100-days and 150-days, respectively, which suggest that the bullish trend is largely intact in the stock.
• Lower net debt and improved cash flow: At the end of Q1FY21, the company reported a solid free cash flow of USD 376 million, as compared to a negative free cash flow of USD 235 million in Q1FY20. Moreover, net debt reduced to USD 541.6 million, from USD 577.2 million in Q4FY20. This is a key positive and indicates higher financial flexibility of the firm.

Q1FY21 Financial Highlights:

• GIL posted its first quarter result, wherein the group posted net sales of at USD 589.6 million, reflecting a surge of 28.4% on y-o-y basis. The growth was primarily driven by a 30.1% y-o-y growth in activewear to USD 484.6 million. Meanwhile, double-digit volume growth was witnessed from the North American and international imprintables markets, supported by favorable product mix.
• Gross profit surged to USD 188.5 million, reflecting a growth of 77% on y-o-y basis. Gross margin stood higher at 32% of sales, as compared to 23.2% in the previous corresponding period.
• Adjusted EBITDA stood significantly higher at USD 145.8 million, significantly higher than USD 50.2 million in pcp.
• The company turned profitable and reported net earnings of USD 98.5 million, as compared to a net loss of USD 99.3 million in Q1FY20.

Income Statement Highlights (Source: Company Report)

Risks: Soft economic outlook, along with lower consumer spendings, might dampen the sales volume. Furthermore, a weak product mix might weigh high on the margins as well. A change in the consumer preference towards other brands may weigh on the margins.

Valuation Methodology: Price to Earnings Based (Illustrative)

Stock Recommendation:

The group reported a decent performance in 1Q21 driven by a demand revival, which is a key positive for the group. The group derived the majority of its income from the United States and reported strong growth from the above geography. GIL is a leading vertically integrated manufacturer of apparel and has an impressive market share in North America. The group made strategic investments of ~USD 2 billion in large-scale, low-cost, vertically integrated facilities, which is expected to support the margin of the group. Furthermore, it invested ~USD 500 million in U.S. yarn spinning asset base close to U.S. cotton sources, which would reduce the company’s logistics costs. We have valued the stock using the Price to Earnings value-based relative valuation method and have arrived at a target upside of single-digit (in percentage terms). For the said purposes, we have considered industry (Textiles and Apparel) mean on an NTM basis. Hence, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 43.83 on June 03, 2021.

One-Year Technical Price Chart (as on June 03, 2021). Analysis by Kalkine Group

NFI Group Inc.

NFI Group Inc. (TSX: NFI) is a Canadian automobile manufacturer and operates through two segments: Manufacturing operations, and Aftermarket operations. Manufacturing operations derives the major revenue and is focus on the manufacture of transit buses for public transportation and motor coaches.

Key Updates:

• Consistent Dividend Distribution: The group has consistently paid a dividend over the past five years, which reflect the stable cashflow generation capability. Moreover, at the at the last traded price, the stock was offering a dividend yield of ~3.2%, which is decent amid a low interest rate environment.

Five-year Dividend Distribution

• Win of New order: On May 26, 2021, the company reported a new order win of 100 additional forty-foot Xcelsior^® heavy-duty transit buses from the Washington Metropolitan Area Transit Authority, a leading bus agency that provides public transit service to over 1,500 square miles in the District of Columbia, Maryland, and Virginia.
• Successful delivery of 500^th electric bus: Recently, the company reported its successful delivery of 500^th electric bus to Go-Ahead London. The company has collaborated with BYD UK and has delivered electric busses to Go-Ahead London since 2016.

Q1FY21 Financial Highlights:

• NFI announces its quarterly result, wherein the company posted revenue of USD 574.119 million as compared to USD 710.384 million in Q1FY20. The decline was primarily due to a lower income from manufacturing operations (USD 459.196 million v/s USD 595.055 million in pcp).
• Gross profit stood at USD 85.834 million, as compared to USD 83.685 million in Q1FY20. The improvement was primarily due to a significantly lower cost of sales of USD 488.285 million v/s USD 626.699 million in pcp.
• Net earnings stood at USD 7.033 million, as compared to a net loss of USD 67.239 million in Q1FY20.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks:  The company’s performance is directly correlated to the international automobile market, and a change in consumer preferences due to postponement of capital expenditure by both public and private bodies, imposition of fresh restriction due to rise in COVID 19 cases might impact the company’s performances.

Valuation Methodology (Illustrative): Price to Cash Flow  

Stock Recommendation:

The group has successfully reduced its total debt to USD 1,159.3 million, reflecting a fall of 9.17% and 8.68% from Q4FY20 and Q1FY21, respectively. This is a key positive as it enhances the financial flexibility of the firm and would result in lower finance costs. The long-term prospect of the group remains bright as a general shift towards lower emission norms through the gradual adaptation of Electric Vehicles primarily for public transportation. Total backlog stood at 8,586 EUs with an approximate value of ~USD 4.4 billion in Q1FY21, up from 8,504 EUs (valued at ~USD 4.3 billion) in Q4FY20. 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 like TFI International Inc, Uni-Select Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 26.26 on June 03, 2021.

One-Year Technical Price Chart (as on June 03, 2021). Analysis by Kalkine Group

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

Disclaimer

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