Ingersoll Rand Inc

Ingersoll Rand Inc (NYSE: IR) is an industrial equipment and technology Company, which manages business through four business segments - Industrial Technologies and Services, Precision and Science Technologies, High Pressure Solutions, and Specialty Vehicle Technologies.

Investment Rationale – Expensive at USD 46.40

• From a technical standpoint, 20-day SMA (58.81) is not supporting an upside potential since it is trading close to an overbought position.
• Near-term visibility is limited since end markets are considerably impacted by economic uncertainties and Covid-19 conditions.
• The demand and outlook for High Pressure Solutions products and services are heavily influenced by oil and natural gas prices.
• In terms of valuation metrics, EV/Sales, EV/EBITDA, Price/Earnings, and Price/Cash Flow are higher as compared to the Industrials sector.

Risk Assessments

• The operational performance is exposed to foreign exchange rates and volatility in oil and gas prices.
• Credit and counterparty risk could also impact the business.
• The Covid-19 disruption has harmed the supply chain and customer demand.
• Potential government regulations and hydraulic fracturing could also impact the demand for its products.

Recent News

7 December 2020: The Company announced the acquisition of Tuthill Vacuum and Blower Systems for US$184 million in cash. The transaction is subject to regulatory approval and third-party consents.

Quarterly Report for the period ended 30 September 2020 (as on 3 November 2020)

 (Source: Company Website)

• During 9M FY20, the Company reported 84.1% year-on-year increase in revenue, while the gross profit grew by 117.6% year-on-year for Q3 FY20.
• The Covid-19 pandemic certainly had a material impact on the Company’s business. Therefore, anticipated benefits of acquisition of the Ingersoll Rand Industrial business might take longer to realise than expected.
• The volatility in oil and gas prices continued to impact the activity level in the High Pressure Solutions segment.
• In Q3 FY20, order book in Industrial Technologies and Services segment reported a 124% year-on-year increase.

One Year Share Price Chart    

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

During Q3 FY20, the Company reported a decline in net income due to higher amortization, operating expenses, and interest expenses. Moreover, economic instabilities in the international markets can impact their growth trajectory since more than half of its sales are generated from non-US operations. Also, the Covid-19 pandemic has significantly affected the supply chain and raw-material prices, which can continue to impact the operating results in the short-term. Nevertheless, the Specialty Vehicle Technologies segment is witnessing a consistent demand. However, considering the decline in net income in Q3 FY20 and overstretched and overbought position of the stock, the stock appears to be expensive to punt on as of now. Stock 52 week High and Low were USD 47.65 and USD 17.01, respectively.

 (Source: Company Presentation)

Based on uncertain economic conditions, gloomy outlook, and valuation conducted above, we have given an “Expensive” recommendation on Ingersoll Rand Inc at the closing market price of USD 46.40 (as on 8 January 2021), while we look forward to reviewing the upcoming catalysts and how quickly it is able to generate anticipated synergy benefits from its recent acquisition.

Darling Ingredients Inc

Darling Ingredients Inc (NYSE: DAR) is a Texas, United States-based food producers Company, which is a producer and developer of sustainable natural ingredients from edible and inedible bio-nutrients. It creates customized specialty solutions and range of ingredients for customers, mainly in the bioenergy, fertilizer, feed, food, fuel, industrial, pet food, and pharmaceutical industries.

Rationale for Valuation – Expensive at USD 65.03

• The Company is trading near a 52-week high, and Price/Earnings, EV/EBITDA, EV/Sales and Price/Cash Flow multiples are significantly higher as compared to corresponding multiples of the Food & Tobacco industry, reflecting overstretched valuations.
• The operating landscape remains highly volatile with the continuing uncertainty due to Covid-19 pandemic.
• From the technical standpoint, 90-day RSI stood at ~76.56 (overbought zone), which means the stock price could decline in the short term.

Key Risks

• The prices of many products are subject to significant volatility associated with the commodities markets, which may affect the Company's operation and negatively impact certain products' prices.
• The biofuels business may be affected by energy policies of U.S. and foreign governments.
• The business may be adversely impacted by fluctuations in exchange rates, which could affect the financial covenants' ability to comply.
• It operates in highly competitive markets, which could adversely affect the Group’s results.
• Changes in environment-related laws and regulations could affect the overall business of the Company.

Q3 FY20 Trading Update (for the three months ended 26 September 2020, as on 3 November 2020)

• In Q3 FY20, the Company reported net sales of US$850.6 million, which was up by 1.02% from the same period of the previous year.
• For the third quarter of 2020, the combined adjusted EBITDA surged by 47.8% year-on-year to US$218.5 million. While, on a year-to-date basis, the combined adjusted EBITDA was US$627.0 million.
• The net income attributable to Darling increased by 293% from US$25.7 million in Q3 FY19 to US$101.1 million in Q3 FY20.
• The Company has a strong balance sheet, with a capital of US$185 million in 9M FY20.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company delivered a strong performance in Q3 FY20, mainly in the international fuel segment. In Q3 FY20, Diamond Green Diesel had a record sales volume of 80 million gallons, with the lowest carbon scoring feedstocks in North America and the lowest cost production system. However, the Company looks to finish up the year (2020) on a positive note producing 285 million gallons of renewable diesel. It has paid down the outstanding term loan B by US$145 million and the leverage ratio of 1.93x, which shows a strong balance sheet. Moreover, in hydrolyzed collagen, the sales were impacted by Covid-19, but it has seen a solid turnaround. Further, it is investing in online infrastructure to meet the changing market dynamics. Moreover, the business is more exposed to the economic uncertainties arising from the Covid-19 pandemic. In the future, the Company may face emerging headwinds and cost pressures. The Group is presently trading near the 52-week high, raising doubts at the upside potential at the current price level. The stock made a 52-week low and high of USD 10.25 and USD 67.81, respectively.

Based on the factors as highlighted above, we believe the stock of Darling Ingredients Inc is “Expensive” at the closing price of USD 65.03 (as on 8 January 2021), with support from few catalysts needs to be evaluated at a later stage such as decent prospects of US market and improved investors sentiments.

Mp Materials Corp

Mp Materials Corp (NYSE: MP) is a Nevada, United States-based Company, which is a producer of rare earth materials. The Company owns and operates Mountain Pass, which is rare earth mining and processing site in North America.

Rationale for Valuation – Expensive at USD 29.49

• The Company is trading near a 52-week high, and Price/Cash Flow multiple is significantly higher as compared to corresponding multiple of the Precious Metals & Minerals industry, reflecting overstretched valuations.
• In September 2020, ROE was in the negative zone.
• In the short-term, the US market is likely to remain under pressure due to increased market volatility.
• From the technical standpoint, shares were trading below the short-term support level of 20-day (US$31.07) simple moving average prices, which reflects a downtrend in the stock and can decline further.

Key Risks

• The Company is exposed to financial risk with fluctuations in precious metals price and exchange rates.
• Furthermore, the unavailability of adequate working capital can impact regular revenue and cash flow.
• The Global Covid-19 pandemic could result in the suspension of operations.
• It operates in highly competitive markets, which could adversely affect the Group’s results.

Trading Update (for the third quarter and nine months ended 30 September 2020, as on 23 November 2020)

(Source: Company Website)

• Led by higher realized pricing and tariff refund received, the Company’s revenue for Q3 FY20 increased by 52% year-over-year to US$41.0 million.
• On a year-over-year basis, the adjusted EBITDA increased by 159% year-over-year to $11.6 million (excluding the US$8.9 million benefits from the tariff refund in Q3 FY20.
• The Company produced 10,197 metric tons of contained ROE (rare earth oxide) in the third quarter, which was higher in both year-over-year and sequentially. While the production cost was down modestly on a sequential basis.
• In the quarter, it sold 9,429 metric tons of REO at an average realized price of US$3,393 per metric ton.
• In November 2020, MP had completed the Business Combination with Fortress Value Acquisition Corp. and was awarded a Defense Production Act Title III technology investment agreement.

Six Months Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

In 2020, the Company continued strong operational execution, with the business combination complete and a fully equitized balance sheet. Further, it expects to continue driving profitable growth. However, the new Covid-19 restrictions will bring macro-economic uncertainty. Moreover, MP remains cautious on the FY20 and FY21 outlook, due to the current pandemic trends. In the future, the Company may face emerging headwinds and cost pressures. The Company is presently trading near the 52-week high, raising doubts at the upside potential at the current price level. The stock made a 52-week low and high of USD 9.78 and USD 40.74, respectively.

Based on the factors as highlighted above, we believe the stock of Mp Materials Corp is “Expensive” at the closing price of USD 29.49 (as on 8 January 2021), with support from few catalysts needs to be evaluated at a later stage. 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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