Finning International Inc.
Q4 results ahead of forecasts and favorable commentary on 2022
Our view: Positive – Q4 results were ahead of forecasts and 2022 outlook commentary points to full-year EPS above current consensus.
Better-than-expected Q4 results – Q4 revenue and earnings were ahead of RBC and consensus forecasts, which resulted in FInning exceeding its mid- cycle EPS/ROIC targets two quarters ahead of intial guidance. Q4 revenue was $1,774MM (+14% YoY; RBC/consensus: $1,768MM/$1,754MM), while Adjusted EBIT was $157MM (+67% YoY; RBC/consensus: $133MM/ $139MM). This reflected higher-than-expected EBIT from Canada and FINSA, partially offset by lower-than-expected EBIT from U.K. & Ireland. Backlog exiting Q4 was $1,860MM (+142% YoY; +17% QoQ), while inventory was $1,687MM (+14% YoY; +4% QoQ). EPS of $0.65 was also well ahead of RBC/consensus of $0.52/$0.53. See detailed results/tables inside.
2022 outlook implies EPS of ~$2.51 (current consensus: $2.34) – Recall that Finning provided "mid-cycle" targets at its June 2021 Investor Day (to be achieved by mid-2022) which included EPS of >$2.00 and ROIC of +15% (among other targets). At Q3/21 the company indicated that the EPS and ROIC targets would be achieved ahead of initial guidance. Today's results reflect 2021 full-year EPS of $2.18 and Adjusted ROIC of 16.4%. Building on the strong results from 2021, management is pointing to "mid-teens and above" EPS growth during the "up-cycle" (which we read as expected EPS growth for 2022 as the release notes that up-cycle demand conditions are expected from the start of 2022). Applying a 15% YoY growth rate to 2021 Adjusted of EPS $2.18 implies 2022 EPS of $2.51 (current consensus is $2.34). We would note that the 17% SG&A as a % of net revenue target is being pushed out (was to be realized over Q3/21-Q2/22 period) due to a greater mix of product support (which carries higher SG&A), lower- than-expected new equipment deliveries in H2/21, and other inflationary headwinds.
Positive outlook across all regions:
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In Canada, strong commodity prices and economic growth in Western Canada in 2022 should support strong demand for equipment and product support across all sectors. Capex in the oil sands is beginning to increase, and aging mining equipment should drive product support demand.
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In South America, outlook for copper production growth in Chile remains constructive, which coupled with a large/mature equipment base and declining ore grades should support demand. Finning continues to anticipate a moderate increase in mining royalties.
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In U.K. and Ireland, ongoing HS2 construction and government investments in other projects are expected to drive U.K. construction equipment demand in 2022. Strong demand for power systems solutions, particularly in the data centre market, is expected to continue.