Linamar: Positive growth prospects for mobile and industrial sectors in 2024 (TSX:LNR:CA) | Private Equity Weekly

summary

Lina horse (TSX:LNR:CA) is a company that designs, manufactures and supplies engineered products.In my previous article, I recommended a Buy rating as its positive growth outlook was driven by its Mobex acquisition and strong quarterly earnings result. In terms of its 4Q23 earnings, the company continues to report solid revenue growth. Additionally, its adjusted operating margin expanded from the same period last year. Going forward, the acquisition of Burgau is expected to complement its agricultural business. My valuation model suggests double-digit upside potential. Therefore, in this article, I reiterate my Buy rating on LNR:CA.

Profit analysis for the fourth quarter of 2023

LNR: CA report strong 4Q23 result. Total revenue increased 19.1% year-over-year to $2.45 billion. Its income can be divided into industrial and action areas. Its industrial segment’s revenue increased 19.8% year over year, driven by strong market share gains in its agriculture and transportation segments.Its industrial segment’s adjusted operating profit was $100.5 million, an increase from the same period last year. An annual increase of 81.8%. The expansion in adjusted operating profit was due to higher sales of its agricultural and aerial work equipment. Its mobile segment’s revenue increased 18.9% year over year, driven by strategic acquisitions and increased sales. In terms of adjusted operating profit, adjusted operating profit was US$91.4 million, an increase of 7% compared with the same period last year.

On a consolidated basis, LNR:CA’s adjusted operating profit was $191.9 million, up 36% annually, driven by strong growth in its industrial and liquidity-adjusted operating profits. Adjusted net profit was US$122.2 million, an annual increase of 22.8%. Adjusted earnings per share were $1.98, up 23% year over year due to strong margins.

Acquisition of Burgo Industries

LNR: CA completes planned acquisition Burgo Industries Ltd. Bourgault is a company that manufactures agricultural equipment. It is considered a leader in large-area seeding and is known for its patented technology for optimized seed placement, which improves seed performance and field yields.

The acquisition is part of management’s plan to strengthen LNR:CA’s market position in the agricultural equipment sector. In addition, the acquisition is expected to provide immediate financial benefits to LNR:CA. Currently, Bourgault’s annual revenue is approximately US$450 million, and its operating profit is on par with other companies in the industry. As of 2023, LNR:CA’s total revenue is approximately $9.7 billion. Therefore, if the acquisition is completed, it is expected to contribute an additional 4.6% to LNR:CA’s revenue.

In addition to the strong financial benefits, another reason for the acquisition was that Bourgault would be able to complement LNR:CA’s agricultural equipment strategy by filling gaps in the sowing and cultivation sectors. With the acquisition of Bourgault, LNR:CA’s agricultural product portfolio now covers the entire cycle of agricultural operations, from field preparation and seeding to harvest and post-harvest activities. The acquisition of Bourgault will therefore strengthen LNR:CA’s product offering and consolidate its position in the agricultural sector.

Positive growth outlook for 2024

As far as 2024 is concerned Growth prospects, I will discuss three segments including light vehicles, agriculture and transportation. In terms of global light vehicle production, it is expected to be flat year-on-year in the first quarter of 2024. Despite the lackluster production outlook, management expects its mobile business to grow at a double-digit rate due to its strong launch volumes.

One thing to note is that the light vehicle market is undergoing a transformation, specifically from battery electric vehicles (BEVs) to internal combustion engine (ICE) and hybrid electric vehicles. However, LNR:CA’s flexible strategy, which includes the use of flexible equipment that allows it to quickly move from one product to another, puts it well-positioned to adapt to these market changes. In fact, it has already helped LNR:CA win business in 2023 for various types of propulsion systems.

On the access side, industry experts expect modest growth in Europe, Asia and the rest of the world, while North America is expected to decline. Globally, it is expected to be flat year-on-year in 2024. Despite the weak outlook, management expects Skyjack’s revenue to grow at a double-digit rate in 2024 due to strong backlog and market share gains.

Finally, for agriculture, experts expect large agricultural machinery, including combine harvesters and high-horsepower tractors, to decline by 10%. Nonetheless, the North American combine conveyor belt market is expected to remain flat. In addition, the windrower segment will also be roughly flat compared to the same period last year. With strong orders from MacDon and the acquisition of Bourgault, management expects its agriculture unit to grow at double-digit rates through 2024.

relative valuation model

LNR:CA is in the automotive parts and equipment industry. Note that BorgWarner (BWA) is listed in the US and I have converted its market cap to Canadian dollars. First, LNR:CA has better growth prospects than its peers. Its expected revenue growth rate is 13.80%, which is significantly higher than the industry median of 4.48%. It’s about three times the peer median.

In addition to performing well in terms of growth prospects, LNR:CA also performs well in terms of TTM profitability. LNR: CA’s net profit margin TTM is 5.17%, which is higher than the industry median of 2.88%. In addition, its gross profit margin TTM is lower at 13.59%, compared with its peers’ median of 18.09%.

Currently, LNR:CA’s forward price-to-earnings ratio is 7.40 times, which is lower than its peers’ median of 8.24 times. Given its growth prospects and superior margin performance, LNR:CA’s P/E ratio should be at least in line with its peers. In 2024, market revenue is expected to be $11.12 billion, while earnings per share in 2024 will be $9.50. These estimates are reasonable given the growth catalysts mentioned above and management’s 2024 revenue guidance. By applying 8.24x to 2024 EPS forecasts, my 2024 price target is $78.28.

risk

Downside risks are related to cyclical risks in the automotive and agriculture industries. Global light vehicle production is expected to be flat in 2024 compared with the same period last year. If inflation persists, the Fed may delay cutting interest rates. In this case, the demand for vehicles may be suppressed due to their high cost. As a result, LNR:CA’s prospects may be negatively affected.

in conclusion

In Q4’23, LNR:CA reported strong double-digit revenue growth, driven by strong growth in the industrial and mobile segments. In addition, its adjusted operating profit margin also expanded compared with the same period last year. Going forward, the acquisition of Bourgault is expected to benefit LNR:CA as the acquisition complements its agricultural equipment strategy. Despite a muted outlook for global light vehicle production, its mobility segment is expected to grow at double-digit rates due to strong launch volumes. Additionally, its Skyjack and agriculture divisions are also expected to grow at double-digit rates due to strong backlog and orders. With double-digit upside potential, I reiterate my Buy rating.

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