td ATB Capital Market analyst Chris Murray thinks a “more cautious stance” on NFI Group Inc. (NFI-T) is necessary following its weaker-than-anticipated 2022 guidance, believing “the risks and the binary nature of outcomes around covenant relief alongside the uncertain timing surrounding supply chains normalizing is likely to weigh on the investability of shares for some time.”
Though he remains “positive on the longer-term demand environment,” Mr. Murray lowered his recommendation for its shares to “speculative buy” from “outperform.”
On Thursday, the Winnipeg-based bus manufacturer dropped 22.5 per cent after announcing it expects adjusted earnings before interest, taxes, depreciation and amortization of US$100-$130-million for the year, well below the forecasts of both Mr. Murray (US$195-million) and the Street (US$191-million). It also slashed its quarterly dividend by 75 per cent (to 31 per share to 5.31 cents).
“The surprising and much weaker-than-expected guidance reflects management’s expectations that supply chains are likely to remain constrained throughout 2022 with a more meaningful recovery not anticipated until 2023,” said Mr. Murray.
“A 75-per-cent dividend cut came with Q4/21 results reflecting greater uncertainty around the cash flow profile with management confirming that discussions concerning further covenant relief remain ongoing with lenders. After the recent debt/equity deal, we see the Company maintaining adequate liquidity to bridge itself to 2023 assuming the forbearance of lenders, which are described as supportive, although likely at an unknown cost, which adds to the uncertainty for equity holders.”
After its fourth-quarte 2021 results exceeded expectations, Mr. Murray did emphasize a positive demand outlook supports NFI over the long term, noting: “Management reaffirmed its 2025 guidance while reiterating that the booking environment remains stronger than ever, underpinned by secular tailwinds around ZEBs and demand for public transit which will extend beyond current supply chain challenges with NFI Forward led cost reductions and aftermarket demand supporting a stronger margin profile over the medium term.”
Reducing his financial estimates to account for the guidance, Mr. Murray cut his target for NFI shares to $21 from $28. The average on the Street is $20.19.
Elsewhere, others making changes include:
* Scotia’s Mark Neville to $22 from $28 with a “sector outperform” rating.
“NFI’s 2022 guidance came in significantly below expectations as the company continues to face an unreliable/unpredictable supply chain, which is resulting in lower vehicle deliveries and significant manufacturing inefficiencies,” he said. “Compounding the matter is a highly specialized product and ‘Buy American’ content rules, making it harder to find substitute suppliers. With a heavy debt load and the likelihood of another near-term covenant breach, the company reduced its quarterly dividend by approximately 75 per cent and started negotiations with its lenders (re: further relief). The company also identified other opportunities to reduce leverage (e.g., A/R factoring) that could provide incremental support. We have made significant downward revisions to our forecasts.”
* National Bank’s Cameron Doerksen to $19 from $26 with an “outperform” rating.
“We concede that the Q4 report and 2022 outlook offered up much to be negative about and few positives,” said Mr. Doerksen. “However, we still see value in the stock underpinned by strong demand drivers. We expect the stock to remain pressured until there is more visibility on the supply chain, but our new target still offers 28-per-cent upside from the current share price.”
* Stifel’s Maggie MacDougall to $11.50 from $22 with a “sell” rating.
“The unfortunate war in Ukraine has compounded global supply chain issues that were already present. Furthermore, inflation in raw material prices appears to be accelerating, which needs to be considered and is likely to present a tricky pricing environment for NFI. We have reduced our 2022 forecast to be at the low end of 2022 guidance,” she said.
* CIBC’s Kevin Chiang to $18 from $25 with a “neutral” rating.
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