Finning International Inc T.FTT

TD Notes

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THey have FTT on their Action Buy List with a $45.00 target. GLTA

Equipment Distributors: Q4/21 Earnings Preview

We See End-market Strength Virtually Across the Board Supply-chain Challenges Could Lengthen the Duration of the Cycle

TD Investment Conclusion

• We see end-market strength virtually across the board for Finning, Toromont, and Wajax, underpinned by healthy GDP growth, robust commodity prices, and favourable prospects for public/private infrastructure spending. Sequentially vs. Q3/21, the environment strengthened in western Canada, on higher oil prices. Recovery from the B.C. flooding is incremental to the short-term rental outlook, and although it may take time before estimates are available, the rebuilding should be additive to the construction outlook. Our Q4/21 EPS estimates are ~5-6% above consensus for Finning and Wajax, and in line for Toromont, whose earnings recovery inflected a little earlier.

• Our sense is that supply-chain performance, which deteriorated in Q3/21, was relatively stable in Q4/21 vs. Q3/21, and the extent of 2022 revenue strength is probably at least somewhat dependent on how supply-chain performance evolves; therefore, we do not believe that backlogs have peaked. We are modelling 2022 revenue growth of 5-10% for Finning, Toromont's Equipment Group, and Wajax, a growth range that seems potentially conservative, even in the context of supply-chain constraints.

• All else being equal, supply-chain disruption, which is common to some degree across all OEMs, should lengthen the duration of this cycle, which we see as having two main areas of potential benefit for the dealers: 1) higher product support activity, as customers will have to maintain their existing fleets and 2) greater demand for used equipment, rental, and rebuilds as other means of satisfying new equipment demand, which is positive for mix, as rental and rebuilds are higher-margin revenue streams (although rental is more capex-intensive).

• Industry inventory levels were well-controlled to start the cycle, and inventory restocking will probably be limited/negligible in 2022, which should facilitate the pass-through of inflationary price increases. Caterpillar reported 450bps of favourable price realization y/y in Q4/21 and is anticipating further price increases in 2022. Similarly, Deere guided to 800bps of favourable price realization in F2022 for the construction and forestry segment.

• It remains a seller's market for used equipment, but Ritchie Bros. has fared relatively well thus far, with GTV up 3% y/y for the nine months ending Q3/21, as exceptionally strong used-equipment pricing offset fewer lots, although negative mix (older machines, etc.) could become more of a factor in 2022, as auctioneers/ dealers/brokers compete for an already thinned-out used-equipment supply. Our Q4/21 adjusted EPS estimate of US$0.63 is above the consensus estimate of US $0.59, but Ritchie Bros.' new earnings definitions have increased forecast difficulty and reduced comparability between analysts.

• We maintain our MARKET WEIGHT sector stance. Among the large market-cap stocks, we see the best upside in Finning. We also rate Wajax as BUY.