TD Martinrea International Inc.
(MRE-T) C$14.21
Q4/23 Preview: Poised for Multiple Expansion
Event
Martinrea is scheduled to report its Q4/23 results on February 29.
Impact: NEUTRAL
Q4/23 Preview: We anticipate the transitory UAW strike should have the greatest
financial impact upon Martinrea within our auto supplier coverage universe. We
believe this is adequately factored into the consensus estimates. The strike, along
with a few GM program changeovers in the quarter, should impact production
volumes and in turn result in a decline in y/y sales. This should lead to a lower y/y
operating margin as well due to margin decrements and the potential for heightened
production inefficiencies. We do, however, anticipate solid positive FCF generation,
that we believe supported Martinrea being active with its NCIB in Q4/23. Our adjusted
EBITDA/EPS forecast of ~$144mm/~$0.40 is in line with consensus.
Investment Thesis: Despite the UAW strike, Martinrea is proving out its post-
pandemic strategy of optimizing its asset base and consistently generating positive
FCF. This should be illustrated by Q4/23 capping off a year of record EPS/FCF. While
slowing EV launch volumes should prove a headwind in 2024, we anticipate the
improvement of overall North American production volumes and the non-recurrence
of the strike to enable Martinrea to further build on its 2023 financial success in
2024, and its financial position. Martinea has a valuation multiple below the low-
end of its historical range and a double-digit FCF yield. As investors gain comfort in
our outlook, we anticipate attractive share price appreciation supported by material
torque (~$8.60) to a one-multiple point change in its applied valuation.
Conclusion: Record EPS in 2023 poised to grow in 2024 should be positive for
Martinrea's valuation, as should a strong FCF outlook, a double-digit FCF yield, an
improving balance sheet supportive of an active NCIB, the potential for a declining
interest rate environment, and a valuation currently near its historical low excluding
its public market holdings. For these reasons, and with our outlook for an improving
financial performance in 2024/2025, we remain constructive with our investment
recommendation. It remains our top pick in our auto supplier coverage.
TD Investment Conclusion
We maintain our ACTION LIST BUY recommendation and $21.00 target price.