RE:CIBC Raises TargetsToromont Industries Ltd. – Neutral; Price Target $168 (Prior $148) – Reporting October 30
For the quarter, we are forecasting revenue of $1,371MM, up from $1,338MM the year prior and versus consensus of $1,377MM. We are expecting EBIT of $178MM, up from $175MM a year ago and versus consensus of $178MM. Key themes we expect out of the quarter are:
• Product Support Update: Performance within the Equipment Group’s Product Support division improved in Q2, posting revenue growth of 3.5% Y/Y. Looking at TIH’s mining business, the company has had strong deliveries over the last several quarters, which at this point typically only requires preventative (lower-spend) maintenance. It is also important to note that the construction segment experienced a shift from a limited supply environment (due to supply chain disruptions) to an improved one. While we expect the product support demand from the component replacement cycle (higher spend) to take some time (it generally takes two to three years of active equipment deployment before reaching the component replacement cycle), we will be looking for indications that the performance within the Equipment Group’s Product Support division is continuing to improve.
• Commentary On AVL: When reporting Q2 results, TIH noted that production at AVL’s Hamilton, Ontario facility had ramped up since the acquisition, and
hiring is progressing at a quick pace. TIH acquired a facility in Charlotte, North Carolina for ~$60MM to expand the production capacity of AVL and serve the eastern U.S. market. TIH revealed at the time that it expects the facility to begin production in Q4, and noted that its capacity could be double that of the Hamilton facility once it is running at full capacity. With AVL a notable addition to TIH, we will be evaluating whether the facility is progressing according to plan and if AVL is meeting the company's expectations.
• Cautious Construction Sentiment: Last earnings, TIH revealed that there continues to be a degree of uncertainty and caution in the construction
marketplace, and while there is clear intent to invest in infrastructure, the company is not yet seeing the level of activity one might assume given the numerous news headlines around infrastructure investment in Canada (the company noted that this was partly due to ongoing trade negotiations and related factors). Although some projects had begun to develop, the time required for engineering and bid processes means that actual construction activity takes time to materialize. We expect the company to comment on the construction marketplace again this quarter, as well as how recent developments have impacted sentiment.
• Capital Allocation Commentary: Given TIH’s net cash position, the company has flexibility when it comes to capital allocation. With its Q3 results, we will be looking for an update on the company’s capital allocation priorities, as well as commentary on TIH’s M&A pipeline.
• Equipment Group Backlog Update: TIH’s Equipment Group backlog has been softer as of late, and while we appreciate that the company’s backlog remains at a healthy level, we would like to see signs that backlog trends are reversing. In Q2, Equipment Group backlog was 28% lower compared to the same time last year (when excluding the order backlog at AVL).