Patience required... For a third time in 2021, Scotia Capital’s Mark Neville cut his financial forecasts for Canadian auto parts manufacturers due to supply chain disruptions, particularly the global semiconductor shortage.
He now expects earnings to remain under pressure through the first half of 2022, however he sees “positive data points on production (not earnings) as the near-term catalyst for the equities.”
“While we had hoped that the situation would have shown some improvement by now, it is becoming increasing clear that these issues/challenges will persist (perhaps well) into 2022,” he said. “Accordingly, we have also materially lowered our 2022E, with a more meaningful volume recovery starting in 2H/22. We sit well below consensus over the near term but expect estimates to move lower and believe lower earnings have been largely reflected in the equity values.
“We have moved our valuation base to our 2023E, which reflects more ‘normalized’ production volumes, but have lowered our valuation multiples by 0.5 times to reflect the limited visibility on the timing/shape of the recovery – and the fact it’s effectively been pushed out a year. We continue to see significant value in the auto names, with volume improvements/production restarts likely acting as the catalyst to move the equities (potentially significantly) higher. However, trying to ‘call the bottom’ on supply chain issues is extremely difficult.”
With his reductions, Mr. Neville also cut his target prices for equities in his coverage universe, include:
- ABC Technologies Holdings Inc. (ABCT-T, “sector outperform”) to $12 from $14. The average on the Street is $10.83.
- Linamar Corp. (LNR-T, “sector outperform”) to $95 from $100. Average: $97.20.
- Magna International Inc. (MGA-N/MG-T, “sector outperform”) to US$105 from US$115. Average: US$105.47.
- Martinrea International Inc. (MRE-T, “sector perform”) to $17.50 from $19. Average: $17.89.
“We believe the equities could move meaningfully higher as supply constraints abate and production/sales ramp back up,” he said.
“While difficult to see the positives with production (and, in turn, sales) volumes being so severely constrained, its important to keep in mind that...
(i.) industry sales were extremely strong prior to the semiconductor shortage (i.e., April SAAR was more than 18 million units and March more than 17.5 million) and, (ii.) inventory levels are now at/near historic lows, which will require a significant rebuild of the supply chain (likely two million+ units).
In our view, it will take quite some time to build an incremental two million+ units when demand is already high. Also, importantly, B/S’s and liquidity positions are strong across the group, which should allow the companies to navigate this period of lower production volumes without too much stress (like 2020).”