EQUITY RESEARCH
August 3, 2022 Earnings Update
FINNING INTERNATIONAL INC.

Full Cycle Resiliency – Q2/22 Review
Our Conclusion

FTT reported solid Q2/22 results and provided impressive H2/22 guidance.
The results of FTT’s restructuring, historic cost cutting, and product support
growth strategy are now on display with solid margins despite ongoing supply
chain challenges and inflationary pressures. Mining backlog and order intake
continues to be strong, which sets up for a decent H2/22 and F2023 (we do
expect to see some weakness in Chile construction and U.K., but these are
relatively small end markets for FTT). We are taking up our H2/22 and F2023
estimates, and our price target increases to $38 from $35. We continue to
believe that FTT is undervalued both from a historical and peer valuation
perspective. We maintain our Outperformer rating.


Key Points
H2/22 EPS Guidance Well Ahead Of Expectations: Given the large
backlog, continued product support growth, and operational execution, FTT
expects above mid-teens EPS growth in H2/22 vs. H2/21. This compares
with H2/22 EPS consensus (at the time of FTT’s Q2/22 results release) of
$1.36, representing a 7% Y/Y increase over the $1.27 EPS reported in
H2/21. We are raising our H2/22 EPS estimates, implying a 16% Y/Y rise.


Supply Chain Challenges Remain, But Strong Revenue Growth To
Continue Over H2/22: While supply chain related challenges are leading to
extended lead times for certain construction equipment, management notes
that mining deliveries (~40% of backlog) are fairly secure. Similar to Q2/22,
FTT expects a step-up in revenue during H2/22, noting that it expects to
deliver 70% of its $2.1B equipment backlog in H2/22. Looking further into
2023, over $600MM or ~30% of current backlog has been booked for next
year, and FTT expects to build on this level through the balance of the year.


Positive F2022 FCF Despite H1/22 Inventory Build: H1/22 FCF was
negative, partly driven by the sizeable build in inventory levels (+32% rise
since the start of the year to $2.2B) to meet the demand reflected in FTT’s
large new equipment backlog and strong parts demand. As FTT delivers on
its backlog, it expects overall F2022 FCF to be positive, implying a notable
improvement in FCF levels for H2/22 (see our FCF forecast on page 2).


Accelerated Product Support Growth Contributing To Strong Results:
Over the last four quarters, FTT has grown its product support revenue (high
margin and economically less sensitive) by ~14% Y/Y (16% growth in Q2/22
vs. Q2/21), well ahead of FTT’s mid-term target of ~8% growth. Aside from
strong demand coming from mining (high equipment utilization and growing
demand for component remanufacturing and equipment rebuilds), product
support revenue in the construction sector in Q2/22 rose 25% vs. a year ago
as a result of FTT’s strategic focus to capture market share in this sector.