Post by
retiredcf on May 11, 2022 9:29am
CIBC
EQUITY RESEARCH
May 10, 2022 Earnings Update
FINNING INTERNATIONAL INC.
Solid South America Performance – Q1/22 Review
Our Conclusion
FTT reported solid Q1/22 results, with results from South America beating
our expectations driven by stronger margins and product support growth.
While we continue to monitor Chile’s constitutional reform process and
expect a resolution over the next six months, it appears that extreme leftist
reforms are being shot down. Overall, backlog/demand across regions
remains solid given the boost from commodity prices, and FTT should
continue to benefit from operating leverage, supporting its “above mid-teens
EPS growth” target for 2022. Our FY2022 estimates increase after
incorporating Q1/22 results; our 2023 estimates remain largely unchanged.
We maintain our Outperformer rating and $50 price target.
Key Points
Constructive On Long-term Chile Copper Mining And Infrastructure
Growth; Expect Further Clarity On Mining Royalties Within Six Months:
Chile’s assembly has until mid-May to approve articles for the draft
constitution and until July to have the draft fully completed. A public vote will
be held on September 4. FTT expects a moderate increase in mining
royalties, which is a realistic assumption in light of recent events. In April, the
constitutional convention rejected a set of proposals focused on expanding
environmental protections in the mining sector. As we get further clarity,
investment decisions related to copper greenfield and expansion projects
should resume. Near term, we continue to expect strong results driven by
increased mining activity (Q1/22 South America EBITDA improved 44% Y/Y).
Much Better Inventory Position; Well Positioned To Deliver Robust
Backlog Despite Industry-wide Supply Constraints: FTT’s equipment
backlog stands at $2.1B, ~11% higher Q/Q and ~75% higher Y/Y. On a Q/Q
basis, backlog was higher in Canada (across all sectors, particularly mining)
and South America (primarily construction). While supply chain constraints
should continue to extend lead times of equipment delivery, FTT now
expects to deliver 85% of its backlog in 2022 due to the improved inventory
position. FTT’s Q1/22 inventory of $2.1B improved $414MM or +25% Q/Q.
Strong Product Support Growth Across Regions: Q1/22 displayed FTT’s
strong execution of its product support growth strategy and the benefit from
higher commodity prices; all regions achieved double-digit Y/Y product
support revenue growth in functional currency. Canada (up +18% Y/Y in
Q1/22) benefitted from strong rebuild demand and continued market share
gains in construction. According to consensus CNQ, SU and IMO estimates
(key customers for FTT), combined oil production is set to increase 4% Y/Y
in 2022 and 4% Y/Y in 2023. In South America (up +14% Y/Y in Q1/22),
strong copper prices should continue to drive mining activity. U.K. (up +10%
Y/Y in Q1/22 in functional currency) saw higher activity in both construction
and power systems.