Magna International rides on global automotive demand as supplier of choice
Toronto-listed Magna International, a global mobility technology company, is one of the world’s largest suppliers in the automotive space. Magna makes body, exteriors and chassis, powertrain, active driver assistance, electronics, mechatronics, seating systems, roofing, and lighting systems and mirrors for the automotive industry.
Our case for the company is based on the recovery from the pandemic, which should boost global demand for the automotive industry. The ability to contain the virus should be better in the future, and this should result in less social movement restriction, which would in turn boost vehicle sales. Magna also has a stellar record for financial performance, and is wellpositioned to capture growing market opportunities given its business model. Magna’s strategic portfolio positions it for strong free cash flow and sales growth, further aided by its position as a supplier of choice for automakers.
Magna is a key player in the value chain as it does not just manufacture and engineer parts of a vehicle such as mirrors and seats, but covers the complete vehicle through its integrated systems. The company’s offerings and services are also agnostic to the type of vehicles, as its portfolio covers internal engine combustion engine (ICE) vehicle to electric vehicles (EVs). Essentially, the company’s portfolio is future-ready as the transition to EVs occurs. Magna’s strategy to drive growth focuses on accelerating the development of capital towards high-growth areas such as contract vehicle manufacturing and electrification, which is aided by its strong competitive position.
On the EV front, the company is well-positioned to capture the growing EV opportunity through increased vehicle content and a larger addressable market compared to ICE. Magna’s flexible production concept and global production network also enable it to scale to meet volume requirements, optimise future expansion, and localise in key markets.
In terms of capital allocation, Magna is prioritising maintaining a strong balance sheet to preserve its liquidity and highinvestment-grade credit ratings, followed by investing for growth through innovation and M&A, and returning capital to shareholders through dividend growth and share repurchases. Magna’s M&A strategy involves achieving the objectives off customer diversification, geographic expansion, complementing and expanding its technology base, and acquiring technologies that enable acceleration in megatrend areas such as electrification.
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Another high-growth area is the advanced driver assistance system, where the company expects sales to grow above market rates at a CAGR of 15%–20% from 2023 to 2027. Magna is well positioned to capture this opportunity through ongoing investments and strategic partnerships. Overall, Magna’s business model has a well-developed framework that will enable it to grow strongly.
Some of the challenges that Magna faces is the global shortage of semiconductor chips which continues to have an adverse effect on global automotive production volumes. This will impact the company’s bottom line as the costs of the chips increase. Global energy shortage could also pose a problem to Magna. However, both these headwinds should be of less concern as the recovery from the pandemic occurs.
The company’s financials for the most recent 3QFY2021 ended Sept 30, 2021, were slightly underwhelming compared to the previous year’s comparable financials, though they were mostly expected.
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Global light vehicle production decreased 12% from 3QFY2020, while total sales decreased 13% to US$7.9 billion ($10.7 billion), from US$9.1 billion in 3QFY2020. The decrease largely reflects lower global light vehicle production and lower assembly volumes, partially offset by the launch of new programmes and net business combinations. Cost of goods sold decreased US$796 million to US$6.89 billion for 3QFY2021, from US$7.68 billion for 3QFY2020, primarily due to lower material costs associated with lower sales, partially offset by higher freight and commodity costs in proportion to sales.
Chart 1 illustrates the company’s historical financials over the past 10 years. The company has a solid track record of positive net income, operating cash flow and free cash flow over the past 10 years. In terms of financial safety, the company has a current ratio of 1.4 times, and a net debt to equity ratio of 0.23, hence liquidity and solvency is not a significant concern for the company. Magna has relatively attractive yields, as its earnings yield, operating cash flow yield, free cash flow yield and dividend yield are 8.6%, 15.5%, 10.4% and 2.2% respectively, compared to the risk-free rate of 1.8%.
Sentiments-wise, there are 15 “buy” calls, three “hold” calls and one “sell” call on the company from analysts. The average target price for the company is around 20% above its current trading price of C$100.38 ($106.61). Our in-house valuations indicate that the company is worth at least 25% above its currently trading price. We think that pandemic-related headwinds can be contained by the company and given its strong financials and position within the value chain, Magna is a company for lower-risk investors seeking medium to long-term growth.
